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Does labour market flexibility matter for investment? A study of manufacturing in the OECD

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  • Roxana Radulescu
  • Martin Robson

Abstract

This study examines whether a more flexible labour market -- defined here in terms of the strictness of labour regulations regarding the flexibility of employers to adjust levels of employment in response to changing economic conditions -- helps to promote a higher level of fixed capital formation in an economy. Theory generates ambiguous predictions concerning the sign of the relationship between investment and the labour market regulation regarding hiring and firing workers, although a positive relationship may be expected. Using an index of labour market regulation compiled from surveys of business executives in 19 Organization for Economic Co-operation and Development (OECD) economies, an econometric analysis is carried out to examine the effects of labour market flexibility on the level of investment in the manufacturing sector. The findings support the proposition that freeing-up regulatory constraints on employers’ use of labour helps to create a more favourable environment for investment.

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  • Roxana Radulescu & Martin Robson, 2013. "Does labour market flexibility matter for investment? A study of manufacturing in the OECD," Applied Economics, Taylor & Francis Journals, vol. 45(5), pages 581-592, February.
    • Handle: RePEc:taf:applec:45:y:2013:i:5:p:581-592
    DOI: 10.1080/00036846.2011.607633
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    References listed on IDEAS

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    1. Risager, Ole & Sorensen, Jan Rose, 1997. "On the effects of firing costs when investment is endogenous: An extension of a model by Bertola," European Economic Review, Elsevier, vol. 41(7), pages 1343-1353, July.
    2. Paul Conway & Giuseppe Nicoletti, 2006. "Product Market Regulation in the Non-Manufacturing Sectors of OECD Countries: Measurement and Highlights," OECD Economics Department Working Papers 530, OECD Publishing.
    3. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
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    Cited by:

    1. Nico Dewaelheyns & Cynthia Van Hulle & Yannick Van Landuyt & Mathias Verreydt, 2021. "Labor Contracts, Wages and SME Failure," Sustainability, MDPI, vol. 13(14), pages 1-15, July.
    2. Burçak Polat, 2017. "Rate of return on foreign investment income and employment labour protection: A panel analysis of thirty OECD countries," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1273588-127, January.

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