Effective Labor Regulation and Microeconomic Flexibility

Ricardo Caballero (), Kevin Cowan (), Eduardo Engel and Alejandro Micco ()

No 1480, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative-destruction, The main reason 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 object to the hypothesis that labor market regulation hinders the process of creative-destruction, its empirical support is limited. In this paper we revisit this hypothesis, using 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: Microeconomics rigidities; Creative-destruction; Job security regulation; Adjustment costs; Rule of law; Productivity growth (search for similar items in EconPapers)
JEL-codes: E24 J23 J63 J64 K00 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2004-09, Revised 2010-06
New Economics Papers: this item is included in nep-law and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d14/d1480.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Effective labor regulation and microeconomic flexibility (2013)
Working Paper: Effective Labor Regulation and Microeconomic Flexibility (2007)
Working Paper: Effective Labor Regulation and Microeconomic Flexibility (2004)
Working Paper: Effective Labor Regulation and Microeconomic Flexibility (2004)
Working Paper: Effective labor regulation and microeconomic flexibility (2004)
Working Paper: Effective Labor Regulation and Microeconomic Flexibility (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1480

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().