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Employment Protection, Technology Choice, and Worker Allocation

40 Pages Posted: 10 Aug 2016  

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

CPB Netherlands Bureau of Economic Policy Analysis

Multiple version iconThere are 5 versions of this paper

Date Written: August 2016

Abstract

We show empirically that high‐risk sectors, which contribute strongly to aggregate productivity growth, are relatively small and have relatively low productivity growth in countries with strict employment protection legislation (EPL). To understand these findings, we develop a two‐sector matching model where firms endogenously choose between a safe technology and a risky technology. For firms that have chosen the risky technology, EPL raises the costs of shedding workers in case they receive a low productivity draw. According to our calibrated model, high‐EPL countries benefit less from the arrival of new risky technologies than low‐EPL countries. Parameters estimated through reduced‐form regressions of employment and productivity on exit costs, riskiness, and in particular their interaction are qualitatively similar for actual cross‐country data and simulated model data. Our model is consistent with the slowdown in productivity in the European Union relative to the United States since the mid‐1990s.

Suggested Citation

Bartelsman, Eric J. and Gautier, Pieter A. and De Wind, Joris, Employment Protection, Technology Choice, and Worker Allocation (August 2016). International Economic Review, Vol. 57, Issue 3, pp. 787-826, 2016. Available at SSRN: https://ssrn.com/abstract=2820792 or http://dx.doi.org/10.1111/iere.12176

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

CPB Netherlands Bureau of Economic Policy Analysis

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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