Employment Protection, Corporate Governance, and Labor Productivity Around the World

Abstract

Consistent with the existing evidence from a single country study, our differences-in-differences estimation finds a negative effect of employment protection legislation (EPL) provisions on labor productivity in a sample of OECD countries. Our study is distinct, however, in that we provide empirical evidence on why EPL reduces labor productivity, which has different practical implications. While the negative effect is more pronounced among firms domiciled in countries with weaker investor protection, less developed takeover markets, and weaker employee incentives to work hard, in industries with less intense competition, and in firms suffering from more severe agency problems and firms with lower pay-for-performance sensitives, our results suggest that the firm-employee agency conflict is the channel through which employment protection legislation hurts labor productivity.

Keywords: Employment protection legislation, Labor productivity, Firm-employee agency conflicts, Corporate Governance