Effective labor regulation and microeconomics flexibility
By: Ricardo J. Caballero ... [et al]
Contributors: Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-30; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-30.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 32
Description: 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, others 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: Microeconomic rigidities, creative-destruction, job security regulation, adjustment costs, rule of law, productivity growth. JEL Classifications: E24, J23, J63, J64, K00.
Notes: Statement of responsibility reads: Ricardo J. Caballero, Kevin N. Cowan, Eduardo M.R.A. Engel and Alejandro Micco.

"August 1, 2004."

Includes bibliographical references (p. 14-15).

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