Employment Protection, Technology Choice, and Worker Allocation

Tinbergen Institute Discussion Paper TI 2010-042/3

49 Pages Posted: 20 Apr 2010

See all articles by Eric J. Bartelsman

Eric J. Bartelsman

Vrije Universiteit Amsterdam; Tinbergen Institute; IZA Institute of Labor Economics

Pieter A. Gautier

Free University of Amsterdam; Tinbergen Institute Amsterdam (TIA); IZA Institute of Labor Economics

Joris de Wind

De Nederlandsche Bank

Multiple version iconThere are 5 versions of this paper

Date Written: April 16, 2010

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 Commications Technology, heterogeneous productivity, sectoral allocation

JEL Classification: J65, O38

Suggested Citation

Bartelsman, Eric J. and Gautier, Pieter A. and de Wind, Joris, Employment Protection, Technology Choice, and Worker Allocation (April 16, 2010). Tinbergen Institute Discussion Paper TI 2010-042/3, Available at SSRN: https://ssrn.com/abstract=1592162 or http://dx.doi.org/10.2139/ssrn.1592162

Eric J. Bartelsman (Contact Author)

Vrije Universiteit Amsterdam ( email )

Amsterdam, ND North Holland
Netherlands
+31 (0)20 44 46044 (Phone)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pieter A. Gautier

Free University of Amsterdam ( email )

Amsterdam, ND North Holland
Netherlands

Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joris de Wind

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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