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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. 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.
  3. John M. Abowd & George T. Milkovich & John M. Hannon, 1990. "The effects of human resource management decisions on shareholder value," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 203-236, February.
  4. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
  5. 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.
  6. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  7. 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.
  8. Michael J. Pries, 2004. "Persistence of Employment Fluctuations: A Model of Recurring Job Loss," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 193-215, 01.
  9. DeVaro, Jed, 2008. "The labor market effects of employer recruitment choice," European Economic Review, Elsevier, vol. 52(2), pages 283-314, February.
  10. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor contracts and flexibility : evidence from a labor market reform in Spain," Economics Working Papers we091811, Universidad Carlos III, Departamento de Economía.
  11. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
  12. 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.
  13. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  14. 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.
  15. 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.
  16. 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.
  17. Veracierto, Marcelo, 2007. "On the short-run effects of labor market reforms," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1213-1229, May.
  18. 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.
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