Labour Market Flexibility and Long-Run Growth in Developed Economies

Raffaella Belloni, W. Robert J. Alexander and Sajid Anwar
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Raffaella Belloni: School of Business and Creative Industries, University of the Sunshine Coast, Queensland, Australia
W. Robert J. Alexander: School of Business and Creative Industries, University of the Sunshine Coast, Queensland, Australia
Sajid Anwar: School of Business and Creative Industries, University of the Sunshine Coast, Queensland, Australia

Economic Analysis Letters, 2024, vol. 3, issue 4, 23-33

Abstract: We examine the relationship between labour market flexibility, as measured by employment protection legislation (EPL), and long-term economic growth in developed economies from 1995 to 2022. We consider conflicting viewpoints on whether rigid labour market regulations hinder or promote economic growth. Employing a cross-country regression model, controlling for factors including initial GDP per capita, capital formation, human capital, research and development, and indicators of macroeconomic performance, we find that only initial income level and capital formation significantly influence long-run growth in real per capita GDP. EPL has no significant impact in the long run, challenging the pre-2000 advocacy of labour market deregulation by major international organisations. We conclude that policy should focus on supporting the investment decisions of the private sector without distorting market mechanisms.

Keywords: Economic Growth; Labour Market Flexibility; Employment Protection Legislation; Developed Economies (search for similar items in EconPapers)
Date: 2024
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