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How Do Firing Costs Affect Innovation and Growth when Workers' Ability is Unknown? – Employment Protection as a Burden on a Firm's Screening Process

  • Berdugo, Binyamin
  • Hadad, Sharon

This paper analyzes the implication of employment protection legislation on a firm's screening process. We present a model in which human-capital-intensive firms (high-tech) with imperfect information about their workers' type attempt during a trial period to identify those incompetent workers who they will subsequently dismiss. Employment protection measures, however, place a burden on this screening process and thereby motivate innovators to embark on medium-tech projects which are more flexible in their human capital requirements. Employment protection legislation thereby distorts the pattern of specialization in favor of medium-tech firms rather than high-tech firms and consequently slows down the process of economic growth. The results of the paper are consistent with documented data on Europe versus US productivity growth and specialization patterns as well as with employment protection legislation in those economies.

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File URL: http://mpra.ub.uni-muenchen.de/11410/1/MPRA_paper_11410.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11410.

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Date of creation: Aug 2008
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Handle: RePEc:pra:mprapa:11410
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  2. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," NBER Working Papers 8460, National Bureau of Economic Research, Inc.
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  12. Saint-Paul, G., 1995. "Is Labour Rigidity Harming Europe's Competitiveness? The Effect of Job Protection on the Pattern of Trade and Welfare," DELTA Working Papers 95-38, DELTA (Ecole normale supérieure).
  13. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  14. Susanto Basu & David N. Weil, 1996. "Appropriate Technology and Growth," NBER Working Papers 5865, National Bureau of Economic Research, Inc.
  15. Christopher Gust & Jaime Marquez, 2002. "International comparisons of productivity growth: the role of information technology and regulatory practices," International Finance Discussion Papers 727, Board of Governors of the Federal Reserve System (U.S.).
  16. Atkinson, Anthony B & Stiglitz, Joseph E, 1969. "A New View of Technological Change," Economic Journal, Royal Economic Society, vol. 79(315), pages 573-78, September.
  17. Oded Galor & Omar Moav & Dietrich Vollrath, 2006. "Inequality in Land Ownership, the Emergence of Human Capital Promoting Institutions, and the Great Divergence," DEGIT Conference Papers c011_001, DEGIT, Dynamics, Economic Growth, and International Trade.
  18. Joseph Zeira, 1998. "Workers, Machines, And Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1091-1117, November.
  19. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  20. Acemoglu, Daron & Robinson, James A, 1998. "Why did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective," CEPR Discussion Papers 1797, C.E.P.R. Discussion Papers.
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