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Employment Protection, Technology Choice, and Worker Allocation

  • Eric J. Bartelsman
  • Pieter A. Gautier
  • Joris de Wind

We show empirically that high-risk innovative sectors are relatively small in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between safe and risky technology. Simulations with our calibrated model are consistent with the data: Strict EPL discourages choosing the emerging risky technology because it is more costly to shed workers upon receiving a bad productivity draw. This mechanism helps explain the lowdown in productivity in the EU relative to the US since the mid-1990s that often is associated with lagging adoption of information technology in the EU.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 295.

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Date of creation: May 2011
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Handle: RePEc:dnb:dnbwpp:295
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