We adopt the analytical approach followed by Alesina, Battisti and Zeira (2015) to analyze the relationship between labor regulation and firms’ technology adoption in member countries of the Organisation for Economic Co-operation and Development (OECD). However, we substantially increase the number and diversity of countries in our analysis. To ensure the broadest country coverage, we develop new indices of employment protection using the World Bank’s Doing Business labor market regulation indicators, which allow differences in restrictions on hours and hiring, dismissal procedures and severance costs to be considered separately in our analysis. We find a statistically and economically significant association between digital technology use by businesses and a country’s statutory minimum wage and its employment protection regulations. Our results are robust to the inclusion of controls for countries’ levels of development, economic stability, available infrastructure and trade openness.

The remainder of this paper is structured as follows. Section II provides a brief overview of the relevant literature. Section III sets out our empirical strategy and describes our data, including the new employment protection variables we constructed from the Doing Business data. Section IV presents results from our cross country multivariate correlations. Section V concludes with a discussion of the implications of our findings for policy making and avenues for further research.

# **II. Review of the literature**

Labor market regulations and interventions such as social insurance are formulated according to each country’s policy making institutions in an attempt to address market imperfections, such as uneven power between those who seek and those who sell labor and human capital, information failures on all sides, and limited or weak insurance markets to mitigate the costs to households from loss of work income (Boeri and van Ours, 2008). The textbook predictions of how regulations, like a statutory minimum wage and restrictions on dismissals, create a wedge between the cost of labor and what people take home, are well known and actively debated. Furthermore, a large literature has been produced applying the textbook models in countries where most people work beyond the reach of regulation, in the informal economy <mark>(Perry</mark> _<mark>et al.</mark>_ 2007; Packard, Koettl, and Montenegro, 2012).

Where the option to ‘informalize’ the production process is available to firms, segmentation of the labor market can happen when a floor is imposed on the cost of labor from a legislated minimum wage that forces a wedge between the earnings of workers not covered by these arrangements and those that are. The textbook models predict that a minimum wage increases labor costs for firms and prevents them from offering formal employment to workers whose marginal productivity does not exceed the minimum. The effect will be stronger for workers with the lowest marginal productivity, especially younger, less experienced workers. Priced out of formal employment, they can join those genuinely unemployed, take informal employment, or seek formal work while working informally. Workers who remain formally employed—those with higher marginal labor productivity—benefit from higher earnings.

Employment protection (employment protection legislation, or EPL) is expected to reduce flows into, but also out of unemployment. Theory shows that EPL reduces turnover and increases average tenure. But it can also slow new employment. If restrictions on dismissing workers make separations costly, it can make employers wary of taking on someone new, or of making innovations 3