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Employment Protection, Technology Choice, and Worker Allocation

Eric Bartelsman (), Pieter Gautier () and Joris De Wind ()
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Joris De Wind: Vrije Universiteit Amsterdam

No 4895, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 legislation; exit costs; information and communications technology; heterogeneous productivity; sectoral allocation (search for similar items in EconPapers)
JEL-codes: J65 O38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-lab and nep-reg
Date: 2010-04
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Related works:
Journal Article: EMPLOYMENT PROTECTION, TECHNOLOGY CHOICE, AND WORKER ALLOCATION (2016) Downloads
Working Paper: Employment Protection, Technology Choice, and Worker Allocation (2011) Downloads
Working Paper: Employment Protection, Technology Choice, and Worker Allocation (2010) Downloads
Working Paper: Employment Protection, Technology Choice, and Worker Allocation (2010) Downloads
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