The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries
Bank of Italy
Università degli Studi di Milano; Institute for the Study of Labor (IZA)
University of Girona; Foundation for Applied Economic Research (FEDEA); Institute for the Study of Labor (IZA)
Università degli Studi di Salerno - Department of Economics
IZA Discussion Paper No. 4158
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.
Number of Pages in PDF File: 50
Keywords: capital-labor substitution, labor market imperfections, financial market imperfections
JEL Classification: J21working papers series
Date posted: May 13, 2009
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