Working Paper: NBER ID: w10744
Authors: Ricardo J. Caballero; Kevin N. Cowan; Eduardo M. Engel; Alejandro Micco
Abstract: Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of economic growth in modern market economies. The main reason for why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, other institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its empirical support is rather weak. In this paper we revisit this hypothesis and find strong evidence for it. We use a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destruction process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law.
Keywords: Labor Regulation; Microeconomic Flexibility; Economic Growth; Job Security
JEL Codes: E24; J23; J63; J64; K00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| job security regulation (J48) | speed of adjustment to shocks (F32) |
| job security regulation (J48) | productivity growth (O49) |
| rule of law + job security regulation (K20) | speed of adjustment to shocks (F32) |
| rule of law + job security regulation (K20) | productivity growth (O49) |