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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

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  • Cingano, Federico

    (Bank of Italy)

  • Leonardi, Marco

    (University of Milan)

  • Messina, Julián

    (Universidad de Alicante)

  • Pica, Giovanni

    (USI Università della Svizzera Italiana)

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

  • Cingano, Federico & Leonardi, Marco & Messina, Julián & Pica, Giovanni, 2009. "The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries," IZA Discussion Papers 4158, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp4158
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    More about this item

    Keywords

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

    JEL classification:

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

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