Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2010-04-19
Number: 10-042/3
Author-Name: Eric J. Bartelsman
Author-Workplace-Name: VU University Amsterdam, IZA
Author-Name: Pieter A. Gautier
Author-Workplace-Name: VU University Amsterdam, CEPR, IZA
Author-Name: Joris de Wind
Author-Workplace-Name: De Nederlandsche Bank, University of Amsterdam
Title: 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 firms 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 reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings 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.
Classification-JEL: J65, O38
Keywords: employment protection legislation, exit costs, Information and Communications Technology, heterogeneous productivity, sectoral allocation
File-Url: https://papers.tinbergen.nl/10042.pdf
File-Format: application/pdf
File-Size: 315800 bytes
Handle: RePEc:tin:wpaper:20100042