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The Economic Effects of Employment Protection: Evidence from International Industry-Level Data

42 Pages Posted: 26 Nov 2006  

Alejandro Micco

University of Chile

Carmen Pages

Inter-American Development Bank (IADB); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

This paper examines the economic effects of employment protection legislation in a sample of developed and developing countries. By implementing a difference-in-differences test, we lessen the potentially severe endogeneity and omitted variable problems associated with cross-country regressions. This test is based on the hypothesis that employment protection regulations are more binding in sectors of activity exposed to higher volatility in demand or supply shocks. Our analysis indicates that more stringent legislation slows down job turnover by a significant amount, and that this effect is more pronounced in sectors that are intrinsically more volatile. We also find that employment and value added in the most affected sectors decline. Employment and output effects are driven by a decline in the net entry of firms. In contrast, average employment per plant is not significantly affected.

Keywords: employment protection legislation, employment reallocation, gross job flows, employment, firm entry and exit

JEL Classification: J23, J32, J63

Suggested Citation

Micco, Alejandro and Pages, Carmen, The Economic Effects of Employment Protection: Evidence from International Industry-Level Data (November 2006). IZA Discussion Paper No. 2433. Available at SSRN: https://ssrn.com/abstract=947097

Alejandro Micco

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Carmen Pages-Serra (Contact Author)

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States
202-623 3110 (Phone)
202-623-2481 (Fax)

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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