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Employment Protection and Misallocation of Resources Across Plants: International Evidence

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  • Addisu A. Lashitew

Abstract

Employment protection affects aggregate productivity via several channels in potentially contradicting ways, which makes it difficult to establish the relationship between the two. This study focuses on the misallocation of production factors across plants, which has been shown in past studies to substantially reduce aggregate productivity. The study provides new evidence on the effect of employment protection on resource misallocation using a large data set of manufacturing plants covering more than 90 countries. For measuring misallocation, I use the within-industry dispersion of the marginal product of labor and total factor productivity. The results show that higher cost of dismissing redundant workers is positively associated with misallocation. This effect appears to be larger in industries that have greater demand for adjusting labor, that is, in industries with intrinsically high layoff rates, and in expanding or shrinking industries. (JEL codes: O40, J08, L60, D24)

Suggested Citation

  • Addisu A. Lashitew, 2016. "Employment Protection and Misallocation of Resources Across Plants: International Evidence," CESifo Economic Studies, CESifo Group, vol. 62(3), pages 453-490.
    • Handle: RePEc:oup:cesifo:v:62:y:2016:i:3:p:453-490.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifv023
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    1. Haltiwanger, John C. & Scarpetta, Stefano & Schweiger, Helena, 2006. "Assessing Job Flows across Countries: The Role of Industry, Firm Size and Regulations," IZA Discussion Papers 2450, Institute of Labor Economics (IZA).
    2. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant Size Distribution and Cross-Country Income Differences," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 243-272, National Bureau of Economic Research, Inc.
    3. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Tosapol Apaitan & Nasha Ananchotikul & Piti Disyatat, 2017. "Structural Transformation in Thailand: A Perspective Through Product Innovation," PIER Discussion Papers 72, Puey Ungphakorn Institute for Economic Research.
    3. Nadav Ben Zeev & Tomer Ifergane, 2022. "Firing Restrictions and Economic Resilience: Protect and Survive?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 93-124, January.
    4. Nadav Ben Zeev & Tomer Ifergane, 2019. "Employment Protection Legislation and Economic Resilience: Protect and Survive?," Working Papers 1910, Ben-Gurion University of the Negev, Department of Economics.

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    More about this item

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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