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Measuring the Effects of Employment Protection on Job Flows: Evidence from Seasonal Cycles

  • Justin Wolfers

Theory implies that employment protection will unambiguously decrease job flows. However, cross-country comparisons of annual rates of job reallocation seem to show that employment protection has no discernible effect on job flows. This paper presents a model that shows that employment protection does not significantly alter a firm’s response to highly persistent shocks – such as those present in annual data. By contrast, quarterly job flows will reflect highly transitory shocks – such as those associated with the seasonal cycle. It is here that employment protection should reduce job flows. Testing this hypothesis requires a consistent set of cross-country set of quarterly job flows. In the absence of such data, a novel approach is used, manipulating available household survey data. Specifically, a measure of job flows caused by the seasonal cycle is constructed. Analyzing these flows across 14 OECD countries, employment protection is shown to have significant and economically meaningful effects on job flows. Indeed, the size of the effect is sufficient to confirm Blanchard and Portugal’s hypothesis that it is employment protection that explains the different pattern of labor turnover between Portugal and the USA.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 98.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:98
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  1. Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind An Unemployment Rate: Comparing Portuguese and Us Unemployment," Working Papers w199803, Banco de Portugal, Economics and Research Department.
  2. Barsky, Robert B & Miron, Jeffrey A, 1989. "The Seasonal Cycle and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 503-34, June.
  3. bertola, G. & Rogerson, R., 1996. "Institutions and Labor Reallocation," Papers 272, Banca Italia - Servizio di Studi.
  4. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
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