Labour market regulations and capital labour substitution

Gilbert Cette, Jimmy Lopez () and Jacques Mairesse

Working papers from Banque de France

Abstract: On the basis of a country*industry unbalanced panel data sample for 14 OECD countries and 18 industries covering the years 1988 to 2007, this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator on four components of total capital and for two skill components of total labor. Relying on a difference-in-difference econometric approach, we find that an increase in EPL has (i) positive and significant effects on the non-ICT capital - labor ratio and the share of high-skill labor; (ii) non-significant effects on the ICT capital labor ratio; (iii) negative and significant effects for R&D capital labor ratio and the share of low-skilled labor. These results suggest that firms consider that the strengthening of Employment Protection Legislation is equivalent to a rise in the cost of labour, resulting in capital-to-labour substitution in favour of non-ICT capital and working at the disadvantage of low-skill relatively to high-skill workers. They indicate to the contrary that structural reforms for more labour flexibility weakening this legislation could have a favourable impact on firms R&D investment and their hiring of low-skill workers.

Keywords: Capital intensity; labour market regulations; factor substitution; R&D capital. (search for similar items in EconPapers)
JEL-codes: C23 E22 E24 L50 O30 O43 O47 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016
New Economics Papers: this item is included in nep-eff, nep-law and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Labour Market Regulations and Capital Intensity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:604

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