Employment Protection, Firm Selection, and Growth

Markus Poschke

No ECO2006/35, Economics Working Papers from European University Institute

Abstract: This paper analyzes the effect of firing costs on aggregate productivity growth. For this purpose, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and the contribution of firm entry and exit to aggregate productivity growth. In this model, growth arises endogenously via market selection among heterogeneous incumbent firms. It is sustained as entrants imitate the best incumbents. In this framework, besides inducing misallocation of labor and reducing entry, firing costs also discourage exit of low-productivity firms. This makes selection less severe and reduces growth. However, exempting exiting firms from firing costs speeds up the exit of inefficient firms and thereby growth, with little change in job turnover. These effects are stronger in sectors where firms face larger idiosyncratic shocks, as in services, fitting evidence that here, EU-US growth rate differences are largest. Introducing firing costs of one year’s wages in a benchmark economy calibrated to the US business (services) sector then leads to 0.1 (0.3) points lower growth. A brief empirical analysis of the impact of firing costs on the size of exiting firms supports the model’s conclusions.

Keywords: endogenous growth theory; firm dynamics; labor market regulation; firing costs; entry and exit; firm selection (search for similar items in EconPapers)
JEL-codes: E24 J63 J65 L11 L16 O40 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cse, nep-dge, nep-ent, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://cadmus.iue.it/dspace/bitstream/1814/6448/1/ECO-2006-35.pdf main text
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Employment protection, firm selection, and growth (2009)
Working Paper: Employment Protection, Firm Selection, and Growth (2007)
Working Paper: Employment protection, firm selection, and growth (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2006/35

Access Statistics for this paper

More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Cécile Brière ().