Working Paper: CEPR ID: DP7806
Authors: Eric J. Bartelsman; Pieter A. Gautier; Joris de Wind
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.
Keywords: employment protection; information and communications technology; search; sectoral allocation
JEL Codes: J65; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strict employment protection legislation (EPL) (K31) | relative size of high-risk innovative sectors (O39) |
| strict employment protection legislation (EPL) (K31) | technology choice (safe technologies) (O33) |
| technology choice (safe technologies) (O33) | productivity in risky sectors (O49) |
| strict employment protection legislation (EPL) (K31) | worker allocation across sectors (J29) |
| strict employment protection legislation (EPL) (K31) | variance of productivity across firms (D29) |
| strict employment protection legislation (EPL) (K31) | productivity slowdown in the EU relative to the US (O49) |