contracts become dead ends in dual labor markets while they act as stepping stones toward stable jobs in others (Cabrales et al., 2017).

The second way employment protection legislation affects productivity is via the speed at which employment protection allows employment adjustment to take place. More stringent employment protection might be bad for productivity since it can slow down the employment adjustment process and the ability of economies to redirect labor resources to the most productive uses (Scarpetta, 2014). Studying a policy change in Belgium that increased employment protection for blue-collar workers (and decreased it for white-collar workers), Alpysbayeva and Vanormelingen (2022) find evidence suggesting a negative impact of employment protection on productivity through this channel. In particular, they find the policy lowered the allocative efficiency of firms that hired more blue-collar workers relative to white-collar workers.

Likewise, by raising labor adjustment costs, stringent employment protection weakens firms’ ability to exploit new (and potentially riskier) technologies and markets (Scarpetta, 2014). In line with this evidence, Caballero et al. (2014) exploit variation across 60 countries to show that more stringent job protection rules slow down the employment adjustment process when in a recessionary/expansionary period, leading to lower productivity growth. Bertrand et al. (2021) show, in the context of a size-dependent policy preventing employment-adjustment of (only) large firms, how an interpretation of the law by the judiciary contributed to the rise of contract labor as a way to overpass the original regulation, rising TFP in Indian manufacturing by 7.6% following a one-time reduction in the misallocation of labor between small and large firms. They also find evidence that the probability that large firms introduced new products rose.

Other channels mentioned in the literature by which job protection might impact productivity include: (a) capital deepening, introducing some discretion to retain what workers rather than applying seniority rules, might lead to capital deepening contributing to higher productivity (Bjuggren, 2018); and (b) temporary workers’ effort (Dolado et al., 2016), when the conversion rate from a temporary contract to a permanent one decreases (i.e. when the gap in firing costs between permanent and temporary workers increases), temporary workers exert less effort lowering productivity.

The impacts of employment protection rules on living standards and productivity are summarized in Table 4.

# **4.4 Unions and Collective Bargaining**

Collective bargaining is the negotiation process that takes place between employees (via unions) and their employers over wages and working conditions (i.e. working time, training, occupational health and safety, etc.).<sup>21</sup> Collective agreements are the outcomes of these negotiations. The coverage offered by collective bargaining differs across types of workers. Some do not have the right to bargain collectively over wages (this is the case for workers in public services who may have their wages determined by state regulation or other methods involving consultation), others are covered by more

> 21International Labor Office (2017) has been a crucial source for this introduction.

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