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Employment Protection and Labor Productivity: Positive or Negative?

  • Pinoli, Sara

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.

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File URL: http://mpra.ub.uni-muenchen.de/11775/1/MPRA_paper_11775.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11775.

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Date of creation: 10 Dec 2007
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Handle: RePEc:pra:mprapa:11775
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  1. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," PIER Working Paper Archive 04-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Haskel, Jonathan, Sonia Pereira, 2003. "Skills and productivity in the UK using matched establishment and worker data," Royal Economic Society Annual Conference 2003 100, Royal Economic Society.
  3. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Does Employment Protection Reduce Productivity? Evidence From US States," Economic Journal, Royal Economic Society, vol. 117(521), pages 189-217, 06.
  4. Michael J. Pries, 2004. "Persistence of Employment Fluctuations: A Model of Recurring Job Loss," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 193-215.
  5. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  7. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain," Working Papers tecipa-346, University of Toronto, Department of Economics.
  8. Veracierto, Marcelo, 2007. "On the short-run effects of labor market reforms," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1213-1229, May.
  9. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
  10. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  11. Jed DeVaro, 2005. "The Labor Market Effects of Employer Recruitment Choice," Labor and Demography 0508006, EconWPA.
  12. Michael Pries & Richard Rogerson, 2005. "Hiring Policies, Labor Market Institutions, and Labor Market Flows," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 811-839, August.
  13. John M. Abowd & George T. Milkovich & John M. Hannon, 1989. "The Effects of Human Resource Management Decisions on Shareholder Value," NBER Working Papers 3148, National Bureau of Economic Research, Inc.
  14. Etienne Wasmer, 2006. "General versus Specific Skills in Labor Markets with Search Frictions and Firing Costs," American Economic Review, American Economic Association, vol. 96(3), pages 811-831, June.
  15. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  16. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  17. John M. Abowd & John Haltiwanger & Ron Jarmin & Julia Lane & Paul Lengermann & Kristin McCue & Kevin McKinney & Kristin Sandusky, 2005. "The Relation among Human Capital, Productivity, and Market Value: Building Up from Micro Evidence," NBER Chapters, in: Measuring Capital in the New Economy, pages 153-204 National Bureau of Economic Research, Inc.
  18. Jed Devaro, 2005. "Employer Recruitment Strategies and the Labor Market Outcomes of New Hires," Economic Inquiry, Western Economic Association International, vol. 43(2), pages 263-282, April.
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