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Employment Protection and the Market for Innovations

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  • Andreas Bastgen
  • Christian Holzner

Abstract

We study the effects of employment protection taking into account that firms can invest in R&D or buy new technologies in order to restore their productivity. To do so we develop an equilibrium matching model with an imperfect labor and innovation market. If employment protection is introduced, firms’ willingness to pay for product or process innovations increases. This shifts economic activity towards firms specializing in process and product innovation and triggers entry of new start-ups. We calibrate our model to match aggregate US labor and product market statistics and show that our model generates the estimated negative impact of wrongful dismissal laws in the US on productivity and the positive effect on the number of innovations and firms.

Suggested Citation

  • Andreas Bastgen & Christian Holzner, 2015. "Employment Protection and the Market for Innovations," CESifo Working Paper Series 5275, CESifo.
    • Handle: RePEc:ces:ceswps:_5275
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. G. Sulis & M. Conti & M. Bratti, 2018. "Employment Protection, Temporary Contracts and Firm-provided Training: Evidence from Italy," Working Paper CRENoS 201802, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    2. Qiao, Lu & Fei, Junjun, 2022. "Government subsidies, enterprise operating efficiency, and “stiff but deathless” zombie firms," Economic Modelling, Elsevier, vol. 107(C).
    3. Edinson Tolentino Raymondi, 2021. "El papel de la formalidad en el acceso al crédito para las micro y pequeñas empresas," Revista de Análisis Económico y Financiero, Universidad de San Martín de Porres, vol. 4(02), pages 01-06.
    4. Butschek, Sebastian & Sauermann, Jan, 2019. "The Effect of Employment Protection on Firms' Worker Selection," IZA Discussion Papers 12305, Institute of Labor Economics (IZA).
    5. Braunerhjelm, Pontus & Ding, Ding & Thulin, Per, 2020. "Labour market mobility, knowledge diffusion and innovation," European Economic Review, Elsevier, vol. 123(C).
    6. Almeida, Carlo Alano Soares de & Fernandes, Kaio César & Oliveira, Denison Murilo de & Rocha, Leonardo Andrade & Silva, Napiê Galvê Araújo, 2020. "Growth and heterogeneity of human capital: effects of the expansion of higher education on the income increase in Brazilian municipalities," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    7. Grodzicki, Maciej J. & Możdżeń, Michał, 2021. "Central and Eastern European economies in a Goldilocks age: A model of labor market institutional choice," Economic Modelling, Elsevier, vol. 104(C).
    8. Makoto Masui, 2020. "The determinants of employers’ use of temporary contracts in the frictional labor market," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 803-834, November.
    9. Chengde You & Huishan Qiu & Zhuojie Pi & Mengyuan Yu, 2023. "Sustainable Enterprise Development in the Manufacturing Sector: Flexible Employment and Innovation in China," Sustainability, MDPI, vol. 15(10), pages 1-30, May.

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    More about this item

    Keywords

    employment protection; firing costs; innovations; patents; productivity; market imperfections;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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