April 26, 2010

Exploring the ambiguous impact of employment protection on employment and productivity

The impact of employment protection on employment and productivity is ambiguous in empirical work. We seek to explain why, studying various types of employment protection in a vintage model with specific investments by firms and workers.

First, the analysis shows that the impact of severance pay can be quite different from other types of employment protection. Lumping them together, as in the OECD indicator, then seems a poor empirical strategy, and we provide empirical support for this.

Second, starting from underinvestment in specific investments, firing costs may actually raise productivity, despite the sclerosis effect on the production structure.

Third, we show that the tenure profile of employment protection matters. The impact of constant employment protection, popular in theoretical work, is quite different from the impact of rising employment protection, popular in practice. We illustrate a number of points quantitatively in a calibration exercise for the Netherlands.


Foto Egbert Jongen
Egbert Jongen +31 6 50746439 Read more
Sabine Visser Read more