Employment protection legislation impacts on capital and skills composition

Abstract

The article investigates the effects of Employment Protection Legislation (EPL) on capital and skills according to the intensity of international competition. Grounded on a panel data sample for 14 OECD countries and 18 industries from 1988 to 2007, and a difference-in-difference approach, we find that strengthening EPL: (i) leads to a capital-labour substitution in favour of non ICT non R&D capital to the detriment of employment, this effect being mitigated in industries highly exposed to international competition; (ii) lowers ICT capital and, even more severely, R&D capital relatively to other capital components; and (iii) works at the relative disadvantage of low-skilled workers. Strengthening EPL can therefore be an impediment to organizational and so technological change and risk taking on globalized markets. An illustrative simulation suggests that structural reforms weakening EPL could have a significant favorable impact on firms’ ICT and R&D investment and on hiring low-skilled workers.