Setting it Right: Employment Protection, Labour Reallocation and Productivity

De Economist (2012), 160: pp. 89-116

28 Pages Posted: 13 Nov 2012

See all articles by John P. Martin

John P. Martin

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS); IZA Institute of Labor Economics; Sciences Po

Stefano Scarpetta

OECD, Directorate for Employment, Labour and Social Affairs; IZA Institute of Labor Economics

Date Written: 2011

Abstract

This paper provides a critical review of the recent empirical evidence on the links between regulations affecting the hiring and firing of workers, labour reallocation and productivity growth. It also reviews how workers affected by labour mobility fare and discusses policy options to support them. The upshot is that stringent employment protection has a sizeable negative effect on labour market flows and, through this channel, hinders productivity growth. At the same time, the evidence also shows that while greater labour market reallocation benefits many workers through higher real wages and better careers, some displaced workers lose out via longer unemployment durations and/or lower real wages in post-displacement jobs. In this context, reforms of employment protection should be considered as part of a comprehensive package that also includes an adequate safety net for the unemployed and effective re-employment services.

Keywords: Job and worker flows, employment protection, productivity

JEL Classification: J23, J53, K31

Suggested Citation

Martin, John P. and Scarpetta, Stefano, Setting it Right: Employment Protection, Labour Reallocation and Productivity (2011). De Economist (2012), 160: pp. 89-116. Available at SSRN: https://ssrn.com/abstract=2175007

John P. Martin (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

IZA Institute of Labor Economics

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

Sciences Po ( email )

rue saint guillaume
Paris
France

Stefano Scarpetta

OECD, Directorate for Employment, Labour and Social Affairs ( email )

2 rue Andre Pascal
Paris Cedex 16, 75016
France
+33 1 45 24 19 88 (Phone)
+33 1 45 24 18 59 (Fax)

IZA Institute of Labor Economics

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

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