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Employment Protection, Technology Choice, and Worker Allocation

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  • Eric J. Bartelsman
  • Pieter A. Gautier
  • Joris de Wind

Abstract

We show empirically that high-risk innovative sectors are relatively small in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between safe and risky technology. Simulations with our calibrated model are consistent with the data: Strict EPL discourages choosing the emerging risky technology because it is more costly to shed workers upon receiving a bad productivity draw. This mechanism helps explain the lowdown in productivity in the EU relative to the US since the mid-1990s that often is associated with lagging adoption of information technology in the EU.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 295.

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Date of creation: May 2011
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Handle: RePEc:dnb:dnbwpp:295

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Keywords: employment protection legislation; exit costs; information and communication technologies; heterogeneous productivity; risky technology; innovation; sectoral allocation;

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References

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  1. Mary O'Mahony & Marcel P. Timmer, 2009. "Output, Input and Productivity Measures at the Industry Level: The EU KLEMS Database," Economic Journal, Royal Economic Society, vol. 119(538), pages F374-F403, 06.
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  3. Rasmus Lentz & Dale T. Mortensen, 2008. "An Empirical Model of Growth Through Product Innovation," Econometrica, Econometric Society, vol. 76(6), pages 1317-1373, November.
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  7. Pieter A. Gautier & Coen N. Teulings, 2006. "How Large are Search Frictions?," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1193-1225, December.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
  9. Andrea Bassanini & Luca Nunziata & Danielle Venn, 2009. "Job protection legislation and productivity growth in OECD countries," Economic Policy, CEPR & CES & MSH, vol. 24, pages 349-402, 04.
  10. Markus Poschke, 2006. "Employment Protection, Firm Selection, and Growth," Economics Working Papers ECO2006/35, European University Institute.
  11. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
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  13. Addison, John T. & Teixeira, Paulino, 2001. "The Economics of Employment Protection," IZA Discussion Papers 381, Institute for the Study of Labor (IZA).
  14. Haskel, Jonathan & Kersley, Barbara & Martin, Christopher, 1997. "Labour Market Flexibility and Employment Adjustment: Micro Evidence from UK Establishments," Oxford Economic Papers, Oxford University Press, vol. 49(3), pages 362-79, July.
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  16. Christopher Martin, . "Evidence from UK Establishments," Economics and Finance Discussion Papers 98-07, Economics and Finance Section, School of Social Sciences, Brunel University.
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Citations

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Cited by:
  1. Chad Syverson, 2010. "What Determines Productivity?," NBER Working Papers 15712, National Bureau of Economic Research, Inc.
  2. Eric J. Bartelsman, 2010. "Searching for the sources of productivity from macro to micro and back," Industrial and Corporate Change, Oxford University Press, vol. 19(6), pages 1891-1917, December.
  3. Bassanini, Andrea & Garnero, Andrea, 2013. "Dismissal protection and worker flows in OECD countries: Evidence from cross-country/cross-industry data," Labour Economics, Elsevier, vol. 21(C), pages 25-41.
  4. Olivér KOVÁCS, 2013. "Black swans or creeping normalcy? – An attempt to a holistic crisis analysis," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 127-143, June.
  5. Eric J. Bartelsman & John C. Haltiwanger & Stefano Scarpetta, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," NBER Working Papers 15490, National Bureau of Economic Research, Inc.
  6. Hyytinen, Ari & Maliranta, Mika, 2011. "Firm Lifecycles and External Restructuring," Discussion Papers 1253, The Research Institute of the Finnish Economy.
  7. Carlos Miguel Silva & Ana Paula Ribeiro, 2011. "The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework," CEF.UP Working Papers 1104, Universidade do Porto, Faculdade de Economia do Porto.

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