Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy
Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 4
38 Pages Posted: 27 Sep 2014
There are 3 versions of this paper
Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy
Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy
Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy
Date Written: June 27, 2014
Abstract
This paper estimates the causal impact of dismissal costs on capital deepening and productivity exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for larger firms. We show that the increase in firing costs induces an increase in the capital-labour ratio and a decline in total factor productivity in small firms relative to larger firms after the reform. Our results indicate that capital deepening is more pronounced at the low-end of the capital distribution -- where the reform hit arguably harder -- and among firms endowed with a larger amount of liquid resources. We also find that stricter EPL raises the share of high-tenure workers, which suggests a complementarity between firm-specific human capital and physical capital in moderate EPL environments.
Keywords: Capital deepening, Severance payments, Regression discontinuity design, Financial market imperfections, Credit constraints
JEL Classification: J65, G31, D24
Suggested Citation: Suggested Citation