This study examines whether a more flexible labour market – defined here in terms of the strictness of labour regulations regarding the flexibility of employers to adjust levels of employment in response to changing economic conditions – helps to promote a higher level of
fixed capital formation in an economy. Theory generates ambiguous predictions concerning the sign of the relationship between investment and the labour market regulation regarding hiring and firing workers, although a positive relationship may be expected. Using an index of labour market regulation
compiled from surveys of business executives in 19 Organization for Economic Co-operation and Development (OECD) economies, an econometric analysis is carried out to examine the effects of labour market flexibility on the level of investment in the manufacturing sector. The findings support
the proposition that freeing-up regulatory constraints on employers’ use of labour helps to create a more favourable environment for investment.
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labour market flexibility;
Document Type: Research Article
Newcastle University Business School Economics, Newcastle University, Ridley Building, 3rd FloorNewcastle upon TyneNE1 7RU, UK
Department of Economics and Finance,Durham University, Durham, UK
Publication date: 2013-02-01
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