Effective Labor Regulation and Microeconomic Flexibility

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

No 10744, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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, other 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.

JEL-codes: E24 J23 J63 J64 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-reg
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Citations: View citations in EconPapers (90)

Published as Caballero, Ricardo J. & Cowan, Kevin N. & Engel, Eduardo M.R.A. & Micco, Alejandro, 2013. "Effective labor regulation and microeconomic flexibility," Journal of Development Economics, Elsevier, vol. 101(C), pages 92-104.

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Related works:
Journal Article: Effective labor regulation and microeconomic flexibility (2013)
Working Paper: Effective Labor Regulation and Microeconomic Flexibility (2010)
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)
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