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Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy

Author

Listed:
  • Federico Cingano

    () (Bank of Italy)

  • Marco Leonardi

    () (University of Milan, Iza and Centro Studi Luca d’Agliano)

  • Julián Messina

    () (World Bank)

  • Giovanni Pica

    () (University of Salerno, CSEF and Centro Studi Luca d’Agliano)

Abstract

Employment protection may affect both productivity and capital investment because higher adjustments costs hamper allocative efficiency and may therefore affect both the optimal capital labor input mix and total factor productivity. To estimate the impact of dismissal costs on capital deepening and productivity we exploit a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. We provide evidence that the increase in firing costs induced capital deepening and a decline in total factor productivity in small firms relative to larger firms after the reform. We also find that capital deepening is more pronounced at the low-end of the capital distribution - where the reform arguably hit harder - and among firms endowed with a larger amount of liquid resources, that have more room to react thanks to an easier access to the credit market. Our results also indicate that the EPL reform reduced the probability to access the credit market, possibly because stricter EPL reduces both the value of the firm and the amount of internal resources that the firm can pledge as collateral against lenders.

Suggested Citation

  • Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2013. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Development Working Papers 354, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:354
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    References listed on IDEAS

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    Cited by:

    1. Andrea Bassanini & Luca Nunziata & Danielle Venn, 2009. "Job protection legislation and productivity growth in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 24, pages 349-402, April.
    2. J. Ignacio García-Pérez & Ioana Marinescu & Judit Vall Castello, 2014. "Can Fixed-Term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain," Working Papers 2014-08, FEDEA.
    3. Bartelsman, Eric & Dobbelaere, Sabien & Peters, Bettina, 2013. "Allocation of Human Capital and Innovation at the Frontier: Firm-Level Evidence on Germany and the Netherlands," IZA Discussion Papers 7540, Institute for the Study of Labor (IZA).
    4. Balazs Egert, 2017. "Regulation, Institutions and Aggregate Investment: New Evidence from OECD Countries," CESifo Working Paper Series 6415, CESifo Group Munich.
    5. You, Jing & Wang, Shaoyang, 2018. "Unemployment duration and job-match quality in urban China: The dynamic impact of 2008 Labor Contract Law," Economic Modelling, Elsevier, vol. 71(C), pages 220-233.
    6. Balázs Égert & Peter Gal, 2017. "The quantification of structural reforms in OECD countries: A new framework," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 91-108.
    7. G. Cette & J. Lopez & J. Mairesse, 2016. "Labour market regulations and capital labour substitution," Working papers 604, Banque de France.
    8. 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.
    9. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po Economics Discussion Papers 2014-11, Sciences Po Departement of Economics.
    10. Guriev, Sergei & Speciale, Biagio & Tuccio, Michele, 2016. "How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession," CEPR Discussion Papers 11403, C.E.P.R. Discussion Papers.
    11. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po publications 33, Sciences Po.
    12. Cette Gilbert & Lopez Jimmy & Mairesse Jacques, 2017. "Employment protection legislation impacts on capital and skill composition," Working Papers 2017-57, Center for Research in Economics and Statistics.
    13. Gilbert Cette & Jimmy Lopez & Jacques Mairesse, 2016. "Labour Market Regulations and Capital Intensity," NBER Working Papers 22603, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Capital Deepening; Severance Payments; Regression Discontinuity Design; Financial;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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