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The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence

  • Gal, Peter N.


    (Tinbergen Institute)

  • Hijzen, Alexander



  • Wolf, Zoltan


    (U.S. Census Bureau)

This paper investigates the role of policies and institutions for aggregate labour market dynamics during the recent financial crisis using firm-level data. First, it provides comparable estimates on firm-level labor adjustment by country, industry and firm size. Second, using variance decomposition methods, it shows that differences in firm-level labor adjustment accounts for about 40% of the cross-country variation in aggregate employment growth at the outset of the crisis. We interpret this as evidence that differences in institutional settings accounted for a substantial part of the variation in aggregate employment growth. Third, we find that stronger protection for regular workers is associated with lower (higher) employment (earnings-per-worker) response in the wake of output shocks. This suggests employment protection shifts the burden of adjustment from the extensive to the intensive margin. However, in explaining the diverse cross-country patterns in employment adjustment during the crisis, the impact of employment protection alone seems to be small.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7404.

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Length: 35 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7404
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  1. Jan Babecky & Philip Du Caju & Theodora Kosma & Martina Lawless & Julian Messina & Tairi Room, 2009. "Downward nominal and real wage rigidity : Survey evidence from European firms," Working Paper Research 182, National Bank of Belgium.
  2. Ricardo J. Caballero & Eduardo Engel & John Haltiwanger, 1996. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," Documentos de Trabajo 6, Centro de Economía Aplicada, Universidad de Chile.
  3. Heinz, Frigyes Ferdinand & Rusinova, Desislava, 2011. "How flexible are real wages in EU countries? A panel investigation," Working Paper Series 1360, European Central Bank.
  4. Sean Dougherty & Verónica Frisancho Robles & Kala Krishna, 2011. "Employment Protection Legislation and Plant-Level Productivity in India," OECD Economics Department Working Papers 917, OECD Publishing.
  5. Cingano, Federico & Leonardi, Marco & Messina, Julián & Pica, Giovanni, 2009. "The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries," IZA Discussion Papers 4158, Institute for the Study of Labor (IZA).
  6. Andrea Bassanini & Andrea Garnero & Pascal Marianna & Sébastien Martin, 2010. "Institutional Determinants of Worker Flows: A Cross-Country/Cross-Industry Approach," OECD Social, Employment and Migration Working Papers 107, OECD Publishing.
  7. Belot, Michèle & van Ours, Jan C., 2000. "Does the Recent Success of Some OECD Countries in Lowering their Unemployment Rates Lie in the Clever Design of their Labour Market Reform?," IZA Discussion Papers 147, Institute for the Study of Labor (IZA).
  8. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA).
  9. Giuseppe Moscarini & Fabien Postel-Vinay, 2012. "The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment," American Economic Review, American Economic Association, vol. 102(6), pages 2509-39, October.
  10. repec:oup:qjecon:v:109:y:1994:i:2:p:309-40 is not listed on IDEAS
  11. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 40-59, Spring.
  12. Hijzen, Alexander & Mondauto, Leopoldo & Scarpetta, Stefano, 2013. "The Perverse Effects of Job-Security Provisions on Job Security in Italy: Results from a Regression Discontinuity Design," IZA Discussion Papers 7594, Institute for the Study of Labor (IZA).
  13. J. P. Gould, 1968. "Adjustment Costs in the Theory of Investment of the Firm," Review of Economic Studies, Oxford University Press, vol. 35(1), pages 47-55.
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