Basic Employment Protection, Bargaining Power, and Economic Outcomes

Stijn Claessens () and Kenichi Ueda

Journal of Law, Finance, and Accounting, 2020, vol. 5, issue 2, 179-229

Abstract: We propose a simple theory suggesting that basic employment protection can improve economy-wide welfare as it mitigates a time inconsistency problem that makes a firm’s promise to workers less credible. By tilting the bargaining power in renegotiations on contract terms toward workers, basic employment protection can incentivize workers to invest in firm-specific human capital and allow firms to keep operating. This contrasts to the case of rigid labor protection, which forces firms to go bankrupt too often with economic costs. We test for the effects using a quasi-natural experiment: US workers gained basic protections between the early-1970s and the mid-1990s, but in years varying by state. We find employment protection to benefit the growth of knowledge-intensive industries. We corroborate another prediction that stronger bargaining powers of workers vis-à -vis other stakeholders since contemporaneous bank branch deregulations (i.e., reduction in banks’ monopoly powers) also benefit knowledge-intensive industries. Although labor and financial reforms are rarely jointly investigated, we confirm that the direct positive effect of basic employment protection prevails when correcting for (changes in) creditors’ powers and vice versa. Since the findings do not maintain for R&D-intensive industries, we interpret the firm-specific human capital in our theory broadly, as for white-collar jobs.

Keywords: Institutions and growth; employment protection; bank monopoly; time inconsistency (search for similar items in EconPapers)
JEL-codes: G28 G33 G34 J08 J83 O16 O43 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Working Paper: Basic Employment Protection, Bargaining Power, and Economic Outcomes (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000045

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