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The effect of employment protection legislation and financial market imperfections on investment: Evidence from a firm-level panel of EU countries

Author

Listed:
  • Federico Cingano

    (Bank of Italy)

  • Marco Leonardi

    (University of Milan)

  • Julián Messina

    (University of Girona)

  • Giovanni Pica

    (University of Salerno)

Abstract
This paper analyzes the joint effect of EPL and financial market imperfections on investment, capital-labour substitution, labour productivity and job reallocation in a cross-country framework. In the spirit of Rajan and Zingales (1998) and Ciccone and Papaioannou (2006), we exploit variation in the need for reallocation at the sectoral and aggregate level to assess the average effect of EPL on firms’ policies. Then, exploiting firm-level information we study if the effect of EPL is stronger in firms with lower levels of internal resources. We find that, on average, EPL reduces investment per worker, capital per worker and value added per worker in high reallocation sectors relative to low reallocation sectors. The reduction in the capital-labour ratio is less pronounced in firms with higher internal resources, suggesting that financial constraints exacerbate the negative effects of EPL on capital deepening.

Suggested Citation

  • Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2009. "The effect of employment protection legislation and financial market imperfections on investment: Evidence from a firm-level panel of EU countries," Working Papers 0914, Banco de España.
    • Handle: RePEc:bde:wpaper:0914
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    More about this item

    Keywords

    capital-labor substitution; labor market imperfections; financial market imperfections;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

    NEP fields

    This paper has been announced in the following NEP Reports:

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