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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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  17. Daron Acemoglu & James A. Robinson, 2000. "Why Did The West Extend The Franchise? Democracy, Inequality, And Growth In Historical Perspective," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1167-1199, November.
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