Quantitative Effects of Employment Protection in OECD Labor Markets

Abstract

This paper explores the quantitative role played by Employment Protection Legislation over employment and on-the-job training in the presence of dual labor markets across OECD economies. We extend the search and matching model by introducing formal education and investment decisions in training by firms, and a gap in firing costs between fixed-term and unlimited contracts. The quantitative analysis shows that the model accounts well for cross-country variation in employment and reasonably well for productivity, while it captures only a modest share of the dispersion in training and temporary employment. Decomposing the sources of heterogeneity, we find that differences in firing costs explain only 2%–20% of the observed cross-country dispersion, whereas education accounts for most of the variation in employment and productivity, and also explains part of the cross-country differences in training

Research funding: Ministerio de Ciencia e Innovación. Grant Numbers: PID2020-113452RB-I00/MICIU/AEI/10.13039/501100011033, PID2023-149660NB-I00/MICIU/AEI/10.13039/501100011033/FEDER,UE; Generalitat de Catalunya. Grant Number: 2021SGR00570 & Instituto de Estudios Fiscales. Open Access funding provided thanks to the CRUE-CSIC agreement with Wiley