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Employment Protection, Technology Choice, and Worker Allocation

  • Bartelsman, Eric


    (VU University Amsterdam)

  • Gautier, Pieter A.


    (VU University Amsterdam)

  • De Wind, Joris


    (VU University Amsterdam)

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4895.

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Length: 48 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4895
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