Employment Protection Deregulation and Labor Shares in Advanced Economies
IMF Working Papers, August 16, 2018
Source details
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- Employment Protection Deregulation and Labor Shares in Advanced Economies
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Bibliographic details
- Authors: Gabriele Ciminelli, Romain A Duval, Davide Furceri
- Published: August 16, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484370087.001
Overview
- Research question: assess the impact of job protection deregulation on labor shares in advanced economies.
- Sample: 26 advanced economies.
- Sample period: 1970-2015.
- Paper type: IMF Working Paper by Gabriele Ciminelli, Romain A Duval, and Davide Furceri (August 16, 2018).
Methodology
- Dataset: newly constructed dataset of major reforms to employment protection legislation for regular contracts.
- Country-level analysis: local projection method to estimate the dynamic response of the labor share to reform events.
- Country-industry analysis: differences-in-differences identification strategy with two theory-grounded identifying assumptions:
- (i) larger negative effects in industries with a higher “natural” propensity to adjust the workforce;
- (ii) larger negative effects in industries with a lower elasticity of substitution between capital and labor.
- Outcome variable: labor share (as used in the paper’s empirical framework).
Key empirical findings
- The paper finds a statistically significant, economically large and robust negative effect of deregulation on the labor share.
- Illustrative back-of-the-envelope calculation: job protection deregulation may have contributed about 15 percent to the average labor share decline in advanced economies.
- Evidence supports heterogeneity in effects across industries based on propensity to adjust workforce and elasticity of substitution between capital and labor.
Policy implications and recommendations
- Policymakers need to address efficiency-equity trade-offs when designing job protection deregulation and other labor market reforms.
- The negative effect of deregulation on labor shares implies potential distributional consequences that should be weighed against macroeconomic gains from reforms.
Research scope and context
- Focus: employment protection deregulation for regular contracts in advanced economies.
- Contextual positioning: contributes to literature on drivers of declining labor shares since the early 1990s.
- Complementary evidence: results should be considered together with existing evidence regarding macroeconomic gains from job protection and other labor market reforms.
Source: Gabriele Ciminelli, Romain A Duval, and Davide Furceri (August 16, 2018), IMF Working Paper No. 2018/186.
Content in this bundle
- Employment Protection Deregulation and Labor Shares in Advanced Economies, WP/18/186, August 2018