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Employment protection and capital-labor ratios

Author

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  • Alexandre Janiak

    (DII - Departamento de Ingenieria Industrial [Santiago])

  • Etienne Wasmer

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

Employment protection (EPL) has a well know 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 non-monotonic relation between capital-labor ratios and EPL: positive at very low levels of EPL, and the negative. We explore the theorical 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. Further, no standard production technology is able to reproduce the inverted U shape pattern of the data.

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  • Alexandre Janiak & Etienne Wasmer, 2014. "Employment protection and capital-labor ratios," Working Papers hal-03460272, HAL.
  • Handle: RePEc:hal:wpaper:hal-03460272
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03460272
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    Cited by:

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    3. 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.
    4. Gilbert Cette & Jimmy Lopez & Jacques Mairesse, 2018. "Employment Protection Legislation Impacts on Capital and Skills Composition," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Études Économiques (INSEE), issue 503-504, pages 109-122.
    5. Stieglitz, Moritz & Setzer, Ralph, 2022. "Firm-level employment, labour market reforms, and bank distress," Journal of International Money and Finance, Elsevier, vol. 120(C).
    6. Gilbert Cette & Jimmy Lopez & Jacques Mairesse, 2016. "Labour Market Regulations and Capital Intensity," NBER Working Papers 22603, National Bureau of Economic Research, Inc.
    7. Tram T.H. Nguyen and Wonho Song, 2021. "Carbon Pricing and Income Inequality: An Empirical Investigation," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 46(2), pages 155-182, June.
    8. Ahmed Tritah, 2016. "Endogenous wage rigidities, human capital accumulation and growth," TEPP Working Paper 2016-08, TEPP.

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    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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