The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries

50 Pages Posted: 13 May 2009

See all articles by Federico Cingano

Federico Cingano

Bank of Italy

Marco Leonardi

Università degli Studi di Milano; IZA Institute of Labor Economics

Julián Messina

University of Girona; Foundation for Applied Economic Research (FEDEA); IZA Institute of Labor Economics

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

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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.

Keywords: capital-labor substitution, labor market imperfections, financial market imperfections

JEL Classification: J21

Suggested Citation

Cingano, Federico and Leonardi, Marco and Messina, Julián and Pica, Giovanni, The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries. IZA Discussion Paper No. 4158, Available at SSRN: https://ssrn.com/abstract=1402505 or http://dx.doi.org/10.2139/ssrn.1402505

Federico Cingano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
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Marco Leonardi

Università degli Studi di Milano ( email )

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IZA Institute of Labor Economics ( email )

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Julián Messina

University of Girona ( email )

Girona, 17071
Spain

Foundation for Applied Economic Research (FEDEA)

Jorge Juan 46
Madrid, 28001
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IZA Institute of Labor Economics

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Germany

Giovanni Pica

Idep, facoltà di economia ( email )

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University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

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University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

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