The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries

Federico Cingano, Marco Leonardi, Julian Messina and Giovanni Pica

No 4158, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the joint effect of EPL and financial market imperfections on investment, capital-labour substitution, labour productivity and job reallocation in a cross-country framework. In the spirit of Rajan and Zingales (1998) and Ciccone and Papaioannou (2006), we exploit variation in the need for reallocation at the sectoral and aggregate level to assess the average effect of EPL on firms' policies. Then, exploiting firm-level information we study if the effect of EPL is stronger in firms with lower levels of internal resources. We find that, on average, EPL reduces investment per worker, capital per worker and value added per worker in high reallocation sectors relative to low reallocation sectors. The reduction in the capital-labour ratio is less pronounced in firms with higher internal resources, suggesting that financial constraints exacerbate the negative effects of EPL on capital deepening.

Keywords: capital-labor substitution; financial market imperfections; labor market imperfections (search for similar items in EconPapers)
JEL-codes: J21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2009-04
New Economics Papers: this item is included in nep-bec, nep-lab and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Published - substantially revised version published in: Economic Policy, 2010, 25 (61). 117 - 163

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Related works:
Journal Article: The effects of employment protection legislation and financial market imperfections on investment: evidence from a firm-level panel of EU countries (2010)
Working Paper: The effect of employment protection legislation and financial market imperfections on investment: Evidence from a firm-level panel of EU countries (2009)
Working Paper: The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU countries (2009)
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