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Employment protection legislation, capital investment and access to credit: evidence from Italy

Author

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  • Federico Cingano
  • Marco Leonardi
  • Julián Messina
  • Giovanni Pica

Abstract

This paper estimates the causal impact of dismissal costs on capital deepening and productivity exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for larger firms. We show that the increase in firing costs induces an increase in the capital-labour ratio and a decline in total factor productivity in small firms relative to larger firms after the reform. Our results indicate that capital deepening is more pronounced at the low-end of the capital distribution - where the reform hit arguably harder - and among firms endowed with a larger amount of liquid resources. We also find that stricter EPL raises the share of high-tenure workers, which suggests a complementarity between firm-specific human capital and physical capital in moderate EPL environments.

Suggested Citation

  • Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2014. "Employment protection legislation, capital investment and access to credit: evidence from Italy," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
  • Handle: RePEc:itt:wpaper:2014-4
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    More about this item

    Keywords

    Capital deepening; severance payments; regression discontinuity design; financial market imperfections; credit constraints;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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