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Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy

Author

Listed:
  • Federico Cingano

    () (Bank of Italy)

  • Marco Leonardi

    () (University of Milan and IZA)

  • Julian Messina

    () (World Bank, University of Girona and IZA)

  • Giovanni Pica

    () (Università di Salerno, CSEF and Centro Luca D'Agliano)

Abstract

Employment protection may affect both productivity and capital investment because higher adjustments costs hamper allocative efficiency and may therefore affect both the optimal capital labor input mix and total factor productivity. To estimate the impact of dismissal costs on capital deepening and productivity we exploit a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. We provide evidence that the increase in firing costs induced capital deepening and a decline in total factor productivity in small firms relative to larger firms after the reform. We also find that capital deepening is more pronounced at the low-end of the capital distribution – where the reform arguably hit harder – and among firms endowed with a larger amount of liquid resources, that have more room to react thanks to an easier access to the credit market. Our results also indicate that the EPL reform reduced the probability to access the credit market, possbily because stricter EPL reduces both the value of the firm and the amount of internal resources that the firm can pledge as collateral against lenders.

Suggested Citation

  • Federico Cingano & Marco Leonardi & Julian Messina & Giovanni Pica, 2013. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," CSEF Working Papers 337, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:337
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    References listed on IDEAS

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    Cited by:

    1. Bartelsman, Eric & Dobbelaere, Sabien & Peters, Bettina, 2013. "Allocation of Human Capital and Innovation at the Frontier: Firm-Level Evidence on Germany and the Netherlands," IZA Discussion Papers 7540, Institute for the Study of Labor (IZA).
    2. Bratti, Massimiliano & Conti, Maurizio & Sulis, Giovanni, 2018. "Employment protection, temporary contracts and firm-provided training: Evidence from Italy," Working Papers 2018-02, Joint Research Centre, European Commission (Ispra site).
    3. Laeven, Luc & McAdam, Peter & Popov, Alexander, 2018. "Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain," CEPR Discussion Papers 13026, C.E.P.R. Discussion Papers.
    4. Balázs Égert, 2018. "Regulation, Institutions and Aggregate Investment: New Evidence from OECD Countries," Open Economies Review, Springer, vol. 29(2), pages 415-449, April.
    5. Balázs Égert & Peter Gal, 2017. "The quantification of structural reforms in OECD countries: A new framework," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 91-108.
    6. repec:eee:ecmode:v:71:y:2018:i:c:p:220-233 is not listed on IDEAS
    7. Cette Gilbert & Lopez Jimmy & Mairesse Jacques, 2017. "Employment protection legislation impacts on capital and skill composition," Working Papers 2017-57, Center for Research in Economics and Statistics.
    8. Mario Izquierdo & Theodora Kosma & Ana Lamo & Simon Savsek & Fernando Martins, 2018. "Did recent reforms facilitate EU labour market adjustment? Firm level evidence," Working Papers w201807, Banco de Portugal, Economics and Research Department.
    9. G. Cette & J. Lopez & J. Mairesse, 2016. "Labour market regulations and capital labour substitution," Working papers 604, Banque de France.
    10. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po Economics Discussion Papers 2014-11, Sciences Po Departement of Economics.
    11. repec:eee:pubeco:v:157:y:2018:i:c:p:138-157 is not listed on IDEAS
    12. J. Ignacio García-Pérez & Ioana Marinescu & Judit Vall Castello, 2014. "Can Fixed-Term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain," Working Papers 2014-08, FEDEA.
    13. Bjuggren, Carl Magnus, 2018. "Employment protection and labor productivity," Journal of Public Economics, Elsevier, vol. 157(C), pages 138-157.
    14. Andrea Bassanini & Luca Nunziata & Danielle Venn, 2009. "Job protection legislation and productivity growth in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 24, pages 349-402, April.
    15. G. Sulis & M. Conti & M. Bratti, 2018. "Employment Protection, Temporary Contracts and Firm-provided Training: Evidence from Italy," Working Paper CRENoS 201802, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    16. Gilbert Cette & Jimmy Lopez & Jacques Mairesse, 2016. "Labour Market Regulations and Capital Intensity," NBER Working Papers 22603, National Bureau of Economic Research, Inc.
    17. Filippo Belloc & Centre for Business Research, 2018. "Institutional Complementarities Between Labour Laws and Innovation," Working Papers wp506, Centre for Business Research, University of Cambridge.
    18. Guriev, Sergei & Speciale, Biagio & Tuccio, Michele, 2016. "How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession," CEPR Discussion Papers 11403, C.E.P.R. Discussion Papers.
    19. You, Jing & Wang, Shaoyang, 2018. "Unemployment duration and job-match quality in urban China: The dynamic impact of 2008 Labor Contract Law," Economic Modelling, Elsevier, vol. 71(C), pages 220-233.
    20. Etienne Wasmer & Alexandre Janiak, 2014. "Employment protection and capital-labor ratios," Sciences Po Economics Discussion Papers 2014-11, Sciences Po Departement of Economics.

    More about this item

    Keywords

    Capital Deepening; Severance Payments; Regression Discontinuity Design; Financial Market Imperfections; Credit Constraints;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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