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The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence

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Author Info

  • Gal, Peter N.

    ()
    (Tinbergen Institute)

  • Hijzen, Alexander

    ()
    (OECD)

  • Wolf, Zoltan

    ()
    (U.S. Census Bureau)

Abstract

This paper investigates the role of policies and institutions for aggregate labour market dynamics during the recent financial crisis using firm-level data. First, it provides comparable estimates on firm-level labor adjustment by country, industry and firm size. Second, using variance decomposition methods, it shows that differences in firm-level labor adjustment accounts for about 40% of the cross-country variation in aggregate employment growth at the outset of the crisis. We interpret this as evidence that differences in institutional settings accounted for a substantial part of the variation in aggregate employment growth. Third, we find that stronger protection for regular workers is associated with lower (higher) employment (earnings-per-worker) response in the wake of output shocks. This suggests employment protection shifts the burden of adjustment from the extensive to the intensive margin. However, in explaining the diverse cross-country patterns in employment adjustment during the crisis, the impact of employment protection alone seems to be small.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7404.

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Length: 35 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7404

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Keywords: global financial crisis; employment protection; labour market adjustment; firm-level data;

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References

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  1. Sean Dougherty & Verónica C. Frisancho Robles & Kala Krishna, 2011. "Employment Protection Legislation and Plant-Level Productivity in India," NBER Working Papers 17693, National Bureau of Economic Research, Inc.
  2. Giuseppe Moscarini & Fabien Postel-Vinay, 2012. "The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment," American Economic Review, American Economic Association, vol. 102(6), pages 2509-39, October.
  3. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions and reform complementarities: Re-assessing the aggregate evidence for OECD countries," Post-Print halshs-00395144, HAL.
  4. Ricardo J. Caballero & Eduardo Engel & John Haltiwanger, 1996. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," Documentos de Trabajo 6, Centro de Economía Aplicada, Universidad de Chile.
  5. Babecky, Jan & Caju, Philip Du & Kosma, Theodora & Lawless, Martina & Messina, Julian & Room, Tairi, 2009. "Downward nominal and real wage rigidity : survey evidence from European firms," Policy Research Working Paper Series 5159, The World Bank.
  6. 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).
  7. Andrea Bassanini & Andrea Garnero & Pascal Marianna & Sébastien Martin, 2010. "Institutional Determinants of Worker Flows: A Cross-Country/Cross-Industry Approach," OECD Social, Employment and Migration Working Papers 107, OECD Publishing.
  8. Heinz, Frigyes Ferdinand & Rusinova, Desislava, 2011. "How flexible are real wages in EU countries? A panel investigation," Working Paper Series 1360, European Central Bank.
  9. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2009. "The effect of employment protection legislation and financial market imperfections on investment: Evidence from a firm-level panel of EU countries," Banco de Espa�a Working Papers 0914, Banco de Espa�a.
  10. Belot, M.V.K. & Ours, J.C. van, 2000. "Does the Recent Success of some OECD Countries in Lowering their Unemployment Rates lie in the Clever Design of their Labour Market Reforms?," Discussion Paper 2000-40, Tilburg University, Center for Economic Research.
  11. Alexander Hijzen & Leopoldo Mondauto & Stefano Scarpetta, 2013. "The Perverse Effects of Job-security Provisions on Job Security in Italy: Results from a Regression Discontinuity Design," OECD Social, Employment and Migration Working Papers 151, OECD Publishing.
  12. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Alexander Hijzen & Leopoldo Mondauto & Stefano Scarpetta, 2013. "The Perverse Effects of Job-security Provisions on Job Security in Italy: Results from a Regression Discontinuity Design," OECD Social, Employment and Migration Working Papers 151, OECD Publishing.
  2. Yama Temouri & Joachim Wagner, 2013. "Do outliers and unobserved heterogeneity explain the exporter productivity premium? Evidence from France, Germany and the United Kingdom," Working Paper Series in Economics 278, University of Lüneburg, Institute of Economics.
  3. Vivian Carstensen, 2013. "The German Labor Market Miracle Revisited: Risk Elimination in Working Time Accounts," Eurasian Journal of Social Sciences, Eurasian Publications, vol. 1(1), pages 19-38.

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