Employment Protection and Labor Productivity: Positive or Negative?

Pinoli, Sara (2007): Employment Protection and Labor Productivity: Positive or Negative?

Abstract

Since the 1980s, many European countries have implemented labor market reforms, introducing more flexible labor contracts. This paper develops a matching model with heterogeneous matches in order to analyse the impact of employment protection on labor productivity. Several channels affects productivity. On one hand, flexible contracts reduce mismatching: low productive jobs are destroyed at no cost with a positive impact on the overall productivity. On the other hand, they imply lower human capital investment, reducing labor productivity. We analyze a third channel: the selection of the employees. Low costs of dismissal reduce the incentive of firms to invest in screening applicants, therefore increasing the uncertainty about their unobserved skills and productivity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Employment protection, Stochastic.job matching model, Screening
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

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