Why is Employment Protection Stricter in Europe than in the Us?

Abstract

In this paper, we argue that the reason why the United States prefer a lower level of employment protection than the European countries lies in the differences in gains and costs from geographical mobility. We present a model where labor migration and employment protection are both determined endogenously. The labor market is modeled within a matching framework, where the employment protection reduces both the job finding and firing rates. Countries with low migration costs and high economic heterogeneity may prefer no employment protection so that workers can move quickly to better horizons rather than being maintained in low productive activities.

Keywords: Geographic labor mobility, employment protection, search frictions, voting

JEL Classification: J61, J63, J64