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How Do Firing Costs Affect Innovation and Growth when Workers' Ability is Unknown? Employment Protection as a Burden on a Firm's Screening Process

  • Binyamin Berdugo
  • Sharon Hadad
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    This paper analyzes the implication of employment protection legislation on a firm's screening process. We present a model in which human-capital-intensive firms (high-tech firms) with imperfect information about their workers' type attempt during a trial period to identify those incompetent workers they will subsequently dismiss. However, employment protection measures place a burden on this screening process thereby motivating innovators to embark on medium-tech projects which are more flexible in their human capital requirements. As such, employment protection legislation distorts the pattern of specialization in favor of medium-tech firms over high-tech firms and consequently slows down the process of economic growth. The results of the paper are consistent with documented data on Europe versus US productivity growth and specialization patterns.

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    File URL: http://eaces.liuc.it/18242979201201/182429792012090101.pdf
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    Article provided by Cattaneo University (LIUC) in its journal The European Journal of Comparative Economics.

    Volume (Year): 9 (2012)
    Issue (Month): 1 (April)
    Pages: 3-30

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    Handle: RePEc:liu:liucej:v:9:y:2012:i:1:p:3-30
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