Working Paper: CEPR ID: DP1338
Authors: Gilles Saint-Paul
Abstract: This paper develops a model to analyse the implications of firing costs on incentives for R&D and international specialization. The key idea is that, to avoid paying firing costs, the country with a rigid labour market will tend to produce relatively secure goods, at late stages in their product life cycles. With international trade, an international product cycle emerges where, roughly, new goods are first produced in the low-firing cost country, and then move to the high-firing cost country. The paper shows that in the closed economy, an increase in firing costs does not necessarily imply a reduction in R&D; it crucially depends on the riskiness of R&D activity relative to productive activity. In the open economy, however, an increase in firing costs is much more likely to reduce R&D intensity.
Keywords: employment protection; firing costs; innovation; product life cycle; R&D; international trade; international specialization
JEL Codes: F12; F17; J21; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher firing costs (L97) | Shift in production from young, innovative goods to mature, stable goods (O14) |
| Increase in firing costs (J32) | Reduction in R&D intensity (in open economy) (O39) |
| Increase in firing costs (J32) | Preference for producing mature goods over new goods (D25) |
| Higher firing costs (L97) | Diminishing R&D incentives in high-firing-cost countries (O39) |
| Increase in firing costs (J32) | Shift in benefits of innovation further into the future (due to competition from foreign imitators) (O39) |