Employment Protection, Technology Choice, and Worker Allocation

Abstract

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where …rms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources.We then simulate the model to re ‡ect both the observed di¤erences across countries in EPL and the observed increase since the mid-1990s in the variance of …rm performance associated with the adoption of information and communication technology. The simulations produce a di¤erential response to the Acknowledgements: We would like to thank Wouter den Haan, Egbert Jongen, Roland Luttens, Marcel Jansen, participants of CAED, Tokyo and ECB/CEPR Labour Market Workshop, Frankfurt as well as seminar participants at the University of Copenhagen, CPB, the Tinbergen Institute, VU Universiy, University of Maastricht and Nederlandsche Bank for useful comments and suggestions. 1 arrival of risky technology between low-and high-EPL countries that coincides with the …ndings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

Cyclical and Stuctural Variation in Resource Reallocation: Evidence for Europe

“…In the U.S., evidence is building up that the magnitude of job reallocation is declining secularly (Hyatt and Spletzer, 2014;Decker et al, 2015), although no clear answer is available about the causes of the decline. By contrast, evidence in Bartelsman, Gautier, and de Wind (2016), shows that in the EU reallocation seems to be higher among innovative and ICT intensive firms, likely because the magnitude of the shocks facing these firms is larger.…”

Dilemmas of Downsizing During the Great Recession: Crisis Strategies of European Employers

“…In addition to the demographic context, the Great Recession of today makes the considerations of downsizing not a fictional choice but rather a dilemma faced by most employers, if not in reality then at least in the backs of their minds. strictness of employment protection legislation in order to estimate macroeconomic effects (Venn (2009), OECD (2009)), or a specific employment protection rule can be modeled in dynamic general equilibrium models (see Bartelsman et al 2010) to derive the direct and indirect allocation effects on the labor market. Although both methods have advantages, we complement the insights provided by current approaches by offering direct evidence of the perceptions of employers about the strictness of employment protection in order to estimate the possible effects on human resource strategies.…”

A vibrant European labor market with full employment

“…The negative effects of employment protection on innovation and employment are widely established by Boeri and Garibaldi (2009), Bartelsman et al (2011) andMurphy et al (2012).…”