TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Cowan,Kevin N.
AU  - Engel,Eduardo M.R.A.
AU  - Micco,Alejandro
TI  - Effective Labor Regulation and Microeconomic Flexibility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10744
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10744
L1  - http://www.nber.org/papers/w10744.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Eduardo Engel
Yale University
Department of Economics
P.O. Box 208268
New Haven, CT  06520-8268
Tel: 203/432-5595
Fax: 203/432-5779
E-Mail: eduardo.engel@yale.edu

Alejandro Micco
IADB
Washington, DC 20036
E-Mail: alejandromi@iadb.org
AB  - Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of economic growth in modern market economies. The main reason for why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, other institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its empirical support is rather weak. In this paper we revisit this hypothesis and find strong evidence for it. We use a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destruction process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law.
ER  -