Job Protection Legislation and Productivity Growth in OECD Countries

We examine the effect of dismissal regulation on productivity in the OECD, using annual cross-country aggregate data on the stringency of employment protection legislation and industry-level data on productivity from 1982 to 2003. Our empirical results suggest that mandatory dismissal regulations have a depressing impact on productivity growth in industries where layoff restrictions are more likely to be binding. By contrast, we find no evidence of a productivity effect of regulations concerning temporary contracts, which suggests that partial reforms, facilitating the use of fixed-term and atypical contracts, are unlikely to have an important impact on efficiency and technological change and cannot therefore be a substitute for comprehensive reforms whereby dismissal restrictions for open-ended contracts are also weakened.