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Employment Protection and Labor Productivity: Positive or Negative?

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  • Pinoli, Sara

Abstract

Since the 1980s, many European countries have implemented labor market reforms, introducing more flexible labor contracts. This paper develops a matching model with heterogeneous matches in order to analyse the impact of employment protection on labor productivity. Several channels affects productivity. On one hand, flexible contracts reduce mismatching: low productive jobs are destroyed at no cost with a positive impact on the overall productivity. On the other hand, they imply lower human capital investment, reducing labor productivity. We analyze a third channel: the selection of the employees. Low costs of dismissal reduce the incentive of firms to invest in screening applicants, therefore increasing the uncertainty about their unobserved skills and productivity.

Suggested Citation

  • Pinoli, Sara, 2007. "Employment Protection and Labor Productivity: Positive or Negative?," MPRA Paper 11775, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11775
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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