The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence

35 Pages Posted: 18 May 2013

See all articles by Peter N. Gal

Peter N. Gal

Organization for Economic Co-Operation and Development (OECD); VU University Amsterdam, Department of Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Alexander Hijzen

Organization for Economic Co-Operation and Development (OECD)

Zoltan Wolf

U.S. Census Bureau - Center for Economic Studies

Abstract

This paper investigates the role of policies and institutions for aggregate labour market dynamics during the recent financial crisis using firm-level data. First, it provides comparable estimates on firm-level labor adjustment by country, industry and firm size. Second, using variance decomposition methods, it shows that differences in firm-level labor adjustment accounts for about 40% of the cross-country variation in aggregate employment growth at the outset of the crisis. We interpret this as evidence that differences in institutional settings accounted for a substantial part of the variation in aggregate employment growth.Third, we find that stronger protection for regular workers is associated with lower (higher) employment (earnings-per-worker) response in the wake of output shocks. This suggests employment protection shifts the burden of adjustment from the extensive to the intensive margin. However, in explaining the diverse cross-country patterns in employment adjustment during the crisis, the impact of employment protection alone seems to be small.

Keywords: global financial crisis, employment protection, labour market adjustment, firm-level data

JEL Classification: E24, J23

Suggested Citation

Gal, Peter N. and Hijzen, Alexander and Wolf, Zoltan, The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence. IZA Discussion Paper No. 7404. Available at SSRN: https://ssrn.com/abstract=2266831

Peter N. Gal (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

VU University Amsterdam, Department of Economics ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Alexander Hijzen

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Zoltan Wolf

U.S. Census Bureau - Center for Economic Studies ( email )

4700 Silver Hill Road
Washington, DC 20233
United States

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