Employment Protection, Technology Choice, and Worker Allocation

Pieter Gautier, Eric Bartelsman and Joris de Wind

No 7806, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

Keywords: Employment protection; Information and commications technology; Search; Sectoral allocation (search for similar items in EconPapers)
JEL-codes: J65 O38 (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (23)

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Working Paper: Employment Protection, Technology Choice, and Worker Allocation (2010)
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