Exploring the ambiguous impact of EPL on employment and productivity

in English What is the impact of employment protection legislation (EPL) on employment and productivity? Ambiguous seems to be the most robust finding. In this paper we explore this ambiguity further. We consider a setup in which the impact of various types of EPL on both employment and productivity is potentially ambiguous, we construct a vintage model with specific investments by firms and workers. The vintage structure gives us endogenous job creation and destruction, allowing for a potential ambiguous effect on employment. Specific investments makes the impact on productivity ambiguous, longer job durations lead to ’sclerosis’ but his may be counteracted by higher specific investments. In this setup we consider the impact of the following types of EPL: i) firing costs, ii) firing taxes to pay for lump sum transfers, iii) firing taxes to pay for unemployment insurance, and iv) severance payments. The analysis shows that the impact of EPL on employment and productivity varies with the type of EPL studied. Hence, lumping various types of EPL into one indicator, as in the popular OECD indicator, may be a poor empirical strategy. For the different types of EPL we also study the impact of the relation between tenure and EPL. Indeed, the impact of ’flat’ EPL can be quite different from EPL that rises with tenure. We illustrate the qualitative points quantitatively in a calibrated model for the Dutch labour market.