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Institutional and Policy Determinants of Labour Market Flows

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Many new firms are created every year. At the same time, many existing firms expand, while others contract or even shut down. In the process, many jobs are created and workers are hired; even as many positions are suppressed and workers separate from their employers. Labour reallocation is an important driver of productivity growth, insofar as less productive firms tend to destroy more jobs and more productive ones to create more jobs. What determines cross‐country differences in hiring and separation rates? Can policies enhance growth by removing barriers to labour reallocation across industries, firms and jobs? Drawing from internationally harmonised data, the chapter analyses the impact of policies and institutions on gross worker flows in order to better inform policy makers on the channels through which policies affect productivity. However, enhancing labour reallocation can have distributional effects insofar as those workers that lose their job usually suffer from substantial declines in earnings and working conditions, in particular during periods of contracting economic activity. What are the effects of different policies on the likelihood and costs of losing a job? The chapter also examines the impact of policies on the incidence of, and wage premia and losses associated with, different types of labour market transitions.

Document Type: Review Article

Publication date: July 1, 2010

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