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Employment Protection, Technology Choice, and Worker Allocation

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Author Info

  • Bartelsman, Eric

    () (VU University Amsterdam)

  • Gautier, Pieter

    () (VU University Amsterdam)

  • De Wind, Joris

    () (VU University Amsterdam)

Abstract

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4895.

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Length: 48 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4895

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Related research

Keywords: employment protection legislation; exit costs; information and communications technology; heterogeneous productivity; sectoral allocation;

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References

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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  2. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA).
  3. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2012. "Americans Do IT Better: US Multinationals and the Productivity Miracle," American Economic Review, American Economic Association, vol. 102(1), pages 167-201, February.
  4. Gautier, Pieter A & Teulings, Coen N, 2005. "How Large are Search Frictions?," CEPR Discussion Papers 5229, C.E.P.R. Discussion Papers.
  5. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  6. Dale T. Mortensen & Rasmus Lentz, 2005. "An Empirical Model of Growth Through Product Innovation," 2005 Meeting Papers 910, Society for Economic Dynamics.
  7. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  8. 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.
  9. Addison, John T. & Teixeira, Paulino, 2001. "The Economics of Employment Protection," IZA Discussion Papers 381, Institute for the Study of Labor (IZA).
  10. Christopher Martin, . "Evidence from UK Establishments," Economics and Finance Discussion Papers 98-07, Economics and Finance Section, School of Social Sciences, Brunel University.
  11. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series WP-99-10, Federal Reserve Bank of Chicago.
  12. Roberto M. Samaniego, 2006. "Employment Protection and High-Tech Aversion," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 224-241, April.
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Cited by:
  1. 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.
  2. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-65, June.
  3. 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.
  4. 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.
  5. Hyytinen, Ari & Maliranta, Mika, 2011. "Firm Lifecycles and External Restructuring," Discussion Papers 1253, The Research Institute of the Finnish Economy.

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