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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 (hightech) with imperfect information about their workers' type attempt during a trial period to identify those incompetent workers who they will subsequently dismiss. Employment protection measures, however, place a burden on this screening process and thereby motivate innovators to embark on medium-tech projects which are more flexible in their human capital requirements. Employment protection legislation thereby distorts the pattern of specialization in favor of medium-tech firms rather than 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 as well as with employment protection legislation in those economies.

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    File URL: http://degit.sam.sdu.dk/papers/degit_13/c013_004.pdf
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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c013_004.

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    Length: 37 pages JEL Classification:
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:deg:conpap:c013_004
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