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

Author

Listed:
  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Bartelsman, Eric & Dobbelaere, Sabien & Peters, Bettina, 2013. "Allocation of Human Capital and Innovation at the Frontier: Firm-Level Evidence on Germany and the Netherlands," IZA Discussion Papers 7540, Institute for the Study of Labor (IZA).
    3. J. Ignacio García-Pérez & Ioana Marinescu & Judit Vall Castello, 2014. "Can Fixed-Term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain," Working Papers 2014-08, FEDEA.
    4. 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.
    5. Laeven, Luc & McAdam, Peter & Popov, Alexander, 2018. "Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain," CEPR Discussion Papers 13026, C.E.P.R. Discussion Papers.
    6. Balázs Égert, 2018. "Regulation, Institutions and Aggregate Investment: New Evidence from OECD Countries," Open Economies Review, Springer, vol. 29(2), pages 415-449, April.
    7. Balázs Égert & Peter Gal, 2017. "The quantification of structural reforms in OECD countries: A new framework," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 91-108.
    8. repec:eee:ecmode:v:71:y:2018:i:c:p:220-233 is not listed on IDEAS
    9. Cette Gilbert & Lopez Jimmy & Mairesse Jacques, 2017. "Employment protection legislation impacts on capital and skill composition," Working Papers 2017-57, Center for Research in Economics and Statistics.
    10. Gilbert Cette & Jimmy Lopez & Jacques Mairesse, 2016. "Labour Market Regulations and Capital Intensity," NBER Working Papers 22603, National Bureau of Economic Research, Inc.
    11. Mario Izquierdo & Theodora Kosma & Ana Lamo & Simon Savsek & Fernando Martins, 2018. "Did recent reforms facilitate EU labour market adjustment? Firm level evidence," Working Papers w201807, Banco de Portugal, Economics and Research Department.
    12. Filippo Belloc & Centre for Business Research, 2018. "Institutional Complementarities Between Labour Laws and Innovation," Working Papers wp506, Centre for Business Research, University of Cambridge.
    13. G. Cette & J. Lopez & J. Mairesse, 2016. "Labour market regulations and capital labour substitution," Working papers 604, Banque de France.
    14. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po Economics Discussion Papers 2014-11, Sciences Po Departement of Economics.
    15. Guriev, Sergei & Speciale, Biagio & Tuccio, Michele, 2016. "How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession," CEPR Discussion Papers 11403, C.E.P.R. Discussion Papers.
    16. You, Jing & Wang, Shaoyang, 2018. "Unemployment duration and job-match quality in urban China: The dynamic impact of 2008 Labor Contract Law," Economic Modelling, Elsevier, vol. 71(C), pages 220-233.
    17. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po Economics Discussion Papers 2014-11, Sciences Po Departement of Economics.
    18. repec:eee:pubeco:v:157:y:2018:i:c:p:138-157 is not listed on IDEAS
    19. Bjuggren, Carl Magnus, 2018. "Employment protection and labor productivity," Journal of Public Economics, Elsevier, vol. 157(C), pages 138-157.

    More about this item

    Keywords

    Capital deepening; severance payments; regression discontinuity design; financial market imperfections; credit constraints;

    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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