Employment and Output Adjustment in the OECD: A Disaggregate Analysis of the Role of Job Security Provisions

Abstract

Job security provisions are frequently cited as inhibiting the functioningof labour markets in Europe. However, as with many forms of non‐priceregulation, it is difficult to assess how tightly these regulations bindand influence labour market outcomes. We use an industry–country panelof OECD countries over 20 years to estimate adjustment paths for employmentand output conditional on wages, the capital stock and exchange rates. Wefind that job security provisions are correlated with the speed ofadjustment of employment and output (restrictive legislation slowingadjustment down), and that controlling for industry effects is importantin isolating this effect.