IDEAS home Printed from https://ideas.repec.org/p/edj/ceauch/288.html
   My bibliography  Save this paper

EPL and capital-labor ratios

Author

Listed:
  • Alexandre Janiak
  • Etienne Wasmer

    ()

Abstract

Employment protection (EPL) has a well known negative impact on labor flows as well as an ambiguous but often negative effect on employment. In contrast, its impact on capital accumulation and capital-labor ratio is less well understood. The available empirical evidence suggests a hump-shaped relation between capital-labor ratios and EPL: positive at very low levels of EPL, and then negative. We explore the theoretical effects of EPL on physical capital in a model of a firm facing labor frictions. Under standard assumptions, theory always implies a motononic negative link between capital-labor ratios and EPL. For a positive link to arise, a very specific pattern of complementarity between capital and workers protected by EPL (senior workers, as opposed to unprotected new entrants, or junior workers) has to be assumed: EPL increases the share of senior workers in employment and by complementarity, leads to higher investment in physical capital. Further, no standard production technology is able to reproduce the inverted U-shape pattern of the data. An extension of the model with specific skills investment is able to reproduce the inverted U-shape pattern. EPL protects and therefore induces investments in specific skills. Under complementarity between capital and specific human capital, physical capital and senior workers having accumulated specific human capital are de facto complement production factors and EPL may increase capital demand at the firm level. Further, the size of this effect varies with the intensity of employment protection: it is low at low levels of EPL, high at higher levels of EPL, hence generating the non-monotonicity. The paper concludes that labor market institutions sometimes have a positive role in a second-best environment.

Suggested Citation

  • Alexandre Janiak & Etienne Wasmer, 2012. "EPL and capital-labor ratios," Documentos de Trabajo 288, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:288
    as

    Download full text from publisher

    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120120719102039.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    2. 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.
    3. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2010. "The effects of employment protection legislation and financial market imperfections on investment: evidence from a firm-level panel of EU countries," Economic Policy, CEPR;CES;MSH, vol. 25, pages 117-163, January.
    4. Costinot, Arnaud, 2009. "On the origins of comparative advantage," Journal of International Economics, Elsevier, vol. 77(2), pages 255-264, April.
    5. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    6. William Kerr & Adriana Kugler & David Autor, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," Working Papers 07-04, Center for Economic Studies, U.S. Census Bureau.
    7. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
    8. Eric Smith, 1999. "Search, Concave Production, and Optimal Firm Size," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 456-471, April.
    9. Alejandro Cuñat & Marc J. Melitz, 2010. "A Many-Country, Many-Good Model of Labor Market Rigidities as a Source of Comparative Advantage," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 434-441, 04-05.
    10. Silva, José Ignacio & Toledo, Manuel, 2009. "Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 76-96, May.
    11. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    12. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    13. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-690, September.
    14. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    15. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Etienne Wasmer & Nicolas Lepage-Saucier & Juliette Schleich, 2013. "Moving towards a single labour contract: pros, cons and mixed feelings," Sciences Po publications info:hdl:2441/772g8m5php8, Sciences Po.
    2. Maria Teresa TRENTINAGLIA DE DAVERIO, 2013. "Country-specific rigidities and investment decisions: quantity competition and demand uncertainty," Departmental Working Papers 2013-15, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano, revised 02 Jul 2014.
    3. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2016. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Economic Journal, Royal Economic Society, vol. 126(595), pages 1798-1822, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:edj:ceauch:288. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/ceuclcl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.