Employment Protection, Technology Choice, and Worker Allocation
64 Pages Posted: 1 Nov 2011
There are 4 versions of this paper
Employment Protection, Technology Choice, and Worker Allocation
Employment Protection, Technology Choice, and Worker Allocation
Employment Protection, Technology Choice, and Worker Allocation
Employment Protection, Technology Choice, and Worker Allocation
Date Written: May 1, 2011
Abstract
We show empirically that high-risk innovative sectors are relatively small in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between safe and risky technology. Simulations with our calibrated model are consistent with the data: Strict EPL discourages choosing the emerging risky technology because it is more costly to shed workers upon receiving a bad productivity draw. This mechanism helps explain the lowdown in productivity in the EU relative to the US since the mid-1990s that often is associated with lagging adoption of information technology in the EU.
Keywords: employment protection legislation, exit costs, information and communication technologies, heterogeneous productivity, risky technology, innovation, sectoral allocation
JEL Classification: J65, O38
Suggested Citation: Suggested Citation
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