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Employment Protection, Product Market Regulation and Firm Selection

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  • Koeniger, Winfried

    (University of St. Gallen)

  • Prat, Julien

    (CREST)

Abstract

This paper analyzes the effect of labor and product market regulation in a dynamic stochastic equilibrium with search frictions. Modeling multiple-worker firms allows us to distinguish between the exit-and-entry (extensive) margin, and the hiring-and-firing (intensive) margin. We characterize analytically how both margins depend on regulation before we calibrate the model to the US economy. We find that firing costs matter most for the intensive margin. Fixed or set-up costs in the product market instead alter primarily the behavior of firms at the extensive margin. Moreover, we find important interactions between the policies through firm selection. Finally, the opposite effect of product and labor market regulation on job turnover rationalizes the empirically observed similarity of turnover rates across countries.

Suggested Citation

  • Koeniger, Winfried & Prat, Julien, 2006. "Employment Protection, Product Market Regulation and Firm Selection," IZA Discussion Papers 1960, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp1960
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    References listed on IDEAS

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    More about this item

    Keywords

    job turnover; firing cost; product market regulation; firm selection; firm turnover;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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