Employment Protection and Gross Job Flows1

This paper examines the empirical relation between employment protection regulation and gross job flows in a sample of developed and developing countries. By implementing a difference in difference test we avoid the potentially severe endogeneity and omitted variable problems associated with cross-country regressions. This test is based on the hypothesis that job security regulations are more binding in some sectors of economic activity than in others depending on sector-specific characteristics such as product demand volatility or factor specificity. Unlike most of the existing literature, our analysis indicates that more stringent job security regulations slow down job reallocation. This is more so in sectors that require higher labor flexibility. These effects occur within the sample of developed and developing countries and are large in magnitude. Moreover, they are robust to changes in regulatory measures, measurement of sector flexibility requirements, control variables and samples. In contrast, regulations on firm entry and exit seem to play a limited role in reducing job flow