Employment Protection, Product Market Regulation and Firm Selection

Winfried Koeniger and Julien Prat

No 1960, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the effect of labor and product market regulation in a dynamic stochastic equilibrium with search frictions. Modeling multiple-worker firms allows us to distinguish between the exit-and-entry (extensive) margin, and the hiring-and-firing (intensive) margin. We characterize analytically how both margins depend on regulation before we calibrate the model to the US economy. We find that firing costs matter most for the intensive margin. Fixed or set-up costs in the product market instead alter primarily the behavior of firms at the extensive margin. Moreover, we find important interactions between the policies through firm selection. Finally, the opposite effect of product and labor market regulation on job turnover rationalizes the empirically observed similarity of turnover rates across countries.

Keywords: job turnover; firing cost; product market regulation; firm selection; firm turnover (search for similar items in EconPapers)
JEL-codes: E24 J63 J64 J65 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2006-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published - revised version published in: Economic Journal, 2007, 117 (521), F302 - F332

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Journal Article: Employment Protection, Product Market Regulation and Firm Selection (2007)
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