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Issue Date: 5-May-2011
Authors: Lisi, Domenico
Title: Regulation and Performance in the Labour Market
Abstract: 1. In recent years the availability of new industry-level data allowed to evaluate the impact of labour market policies more consistently than previous standard cross-country studies. In this paper an industry-level panel is exploited to evaluate the impact of less stringent Employment Protection Legislation (EPL) for temporary employment (TE) in EU countries. A reduced form model is estimated to identify the overall effect on labour productivity growth. The advantage of using industry-level data is fourfold. First, as in standard cross-country studies, the cross-country variation of EPL is still exploited. Second, in contrast with the cross-country analysis, the specification allows us to control for unobserved fixed effects, potentially correlated with the level of EPL. Third, as the previous literature emphasised, the within-industry' composition effect' appears to be negligible, allowing us to identify the' independent effect' of TE. Fourth, to the extent that events in a single industry are not able alone to affect the policy in a country, the specification is less subject to the simultaneity problem between variable of interest and policy. The theoretical literature on TE has not established a clear prediction on the sign of the effect, existing different convincing reasons for both directions. Thus, the results of the analysis have potentially important policy implications. Our finding is that the introduction of temporary contracts has a negative, even if small in magnitude, effect on labour productivity growth. 2. Recent papers emphasised as the use of temporary contracts (TE) could have a detrimental effect on labour productivity, particularly because the wrong utilization of TE might induce a reduction in effort. However, there are different reasons to believe that the impact of TE might not be homogeneous across sectors and, in particular, in this paper we wonder if this negative effect differs according to sectors skill intensity. To this extent, we divide sectors between skilled and unskilled and specify a diff-in-diff strategy to identify the different impact of TE. Moreover, the industry-level panel allows us to deal with different endogeneity problems, as simultaneity and omitted variable bias. Our central result is that TE is even more damaging in skilled sectors and this would seem robust to little changes in the skill intensity index and in the sample used. Our main intuition is that the reduction in effort is more harmful in those sectors where production uses skills more intensively. Indeed, this result could have very important policy implications for labour market regulation. 3. The standard analysis of the impact of EPL on labour market outcomes concentrates mainly on unemployment, disregarding the possible effect on productivity. In this paper we make (a component of) labour productivity endogenous and analyze how the presence of a stringent protection legislation affects labour market in an equilibrium matching model with endogenous job destruction. Indeed, considering labour productivity an endogenous could be important not only in the case of EPL, but also for all kind of personnel policy evaluation. In this framework high labour productivity on one hand is costly in terms of effort, on the other hand is beneficial in terms of lower job destruction. We find that high firing costs partially substitute high labour productivity in reducing job destruction and this, consequently, brings down the optimal level of productivity. Moreover, the impact of EPL on unemployment is ambiguous but numerical exercises show unambiguously how higher firing restrictions reduce different measures of aggregate welfare. To some extent, the clear emergence of these results is full of policy implication and, indeed, rationalizes the recent empirical evidence on the impact of EPL.
Appears in Collections:Area 13 - Scienze economiche e statistiche

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