Employment protection and labour productivity growth in the EU: skill-specific effects during and after the Great Recession

Abstract

Does employment protection affect sectoral productivity growth differently during crises and recovery periods? This paper sheds light into this question by investigating the relationship between employment protection legislation (EPL hereafter) and sectoral labour productivity growth in the EU in the context of the Great Recession. We consider the crisis and recovery periods, evaluate the relevance of both levels and changes in EPL for productivity growth, and explore the conditioning role played by sectoral differences in terms of cumulativeness of knowledge as well as the skills of the labour force, captured by different levels of education. We find that stricter labour protection reduces labour productivity growth in sectors with a large share of workers with tertiary education, whereas this effect is negligible or positive in sectors where workers with secondary or only primary education are more prevalent (such as agriculture, mining and quarrying). We attribute this to a more intensive labour hoarding in the former, as EPL strengthens labour hoarding in sectors that rely on firm-specific knowledge accumulation and skilled human capital that are difficult to substitute with physical capital. Whereas it is simple to dismiss (and to find later) unskilled employees. They not only can be substituted more easily with capital, but also the costs of their firing are lower, they are overrepresented among workers holding temporary contracts, and they might be unequally informed and able to exercise their rights. This leads to low (if any) labour hoarding and little impact of EPL on labour productivity in such sectors. We also document that the negative effect is prominent only during the crisis, and an increase in the stringency of EPL over an extended period stimulates employers to substitute labour with investments in physical and knowledge capital.

The Impact of the Great Recession on Well-Being across Europe Ten Years On: A Cluster Analysis

“…One of our main findings is that in 2012 employment-related issues stand out as a major determinant of the worsening of the quality of life. This result can be traced back to the negative impact of the demise of EPL of the hoarding of low-skilled workers during the crisis, as argued in Fedotenkov et al (2024) who employ microdata and specifically address the effects of the Great Recession on labor productivity, detailed by country and sector.…”

“…The results of our paper can be compared with those reached by studies aimed at the evaluation of the effects of the Great Recession on European countries (e.g., Mazurek 2016;Fedotenkov et al 2024) and of the countries' performance towards the EU2020 targets (e.g., Grimaccia 2021). Overall, our results are compatible with them, although the aims, scope, and methods may differ.…”