Job Protection Legislation and TFP Growth in OECD Countries. Discussion Federico Cingano BI, November 2008

Question: Does EPL slow down TFP growth? If EPL slows employment reallocation, it might prevent firms from fully exploiting existing growth opportunities. DID-like (“Rajan-Zingales”) approach  Negative relationship:  i.e. high-EPL countries see slower TFP growth in industries with stronger need for labour reallocation (higher layoff rates) 73-pages, 23-tables paper, plenty of robustness checks and discussions.. Hard to think of something missing!

Empirical framework Year-by-year country-industry TFP growth (1982-2003) Interaction of country-level EPL with a measure of (frictionless) industry needs for layoffs/reallocation. Think of “amount” and “relevance” of regulation. Country and industry fixed-effects can be accounted for

Issue #1: measuring j “Standard” approach: measuring industry requirements taking j from a benchmark, low regulated country (here, the US in 2000-2003..). Idea: in those countries layoff/reallocation is unlikely to reflect frictions in the labour market But j might reflect idiosyncratic shocks (es. Fisman-Sarria, 2004)  Measurement error + attenuation bias?  If shocks correlated with EPL can yield to estimate positive effects even when there are none (Ciccone and Papaioannou, 2006, 2008)

Issue #1: possible solution Estimate layoff/reallocation rates for a hp. “frictionless economy” using data on all countries .. .. and accounting for the fact that in countries with high employment protection, job reallocation might not just reflect industry characteristics Use estimates of αj and j to build alternative measure of frictionless industry-need for layoff/reallocation. The industry ranking might change significantly with respect to country benchmarking case. (fig)

Issue #2: methodology “Standard” approach: When relying on benchmark-country weights, the benchmark country is normally excluded from the main regression (a problem here?) “Standard” approach: provide, if possible, evidence of “direct” effect (i.e. of EPL on labor market flows)  Note: Red Tape costs shown to have strong effects of the speed of employment reallocation. Is EPL estimate robust to RT (≠PMR)?

Issue #3: what is  capturing? Do we estimate short- or long-run effects of EPL on TFP? (issue discussed in the paper) Interpretation problem arises because TFP is year-by-year and EPL does not vary much over time ( may capture lagged level effects)  Why not try the standard cross-country cross-industry specification where growth rates are 20-year averages and EPL is beginning-of-period?

Example with industry job reallocation Source: Amadeus

Example