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Employment protection and productivity: evidence from firm-level panel data in Japan

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Recent developments in the literature on Employment Protection Legislation (EPL) have revealed that changing the stringency of employment protection can lead to extensive consequences outside the labour market, by affecting firms’ production decisions or workers’ commitment levels. This article provides the first empirical evaluation of the comprehensive effect of restrictions on firing employees in Japan, by exploiting the variations in court decisions. We find that judgements lenient to workers significantly reduce firms’ total-factor productivity growth rate. The effect on capital is mixed and inconclusive, although we obtain modest evidence that an increase in firing costs induces a negative scale effect on capital inputs.
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Keywords: J65; K31; K41; capital substitution; employment protection; firing cost; total factor productivity

Document Type: Research Article

Affiliations: 1: Department of Economics,Okayama University, 3-1-1, Tsushima-naka, Kita-kuOkayama City,Okayama 700-8530, Japan 2: Department of Economics,Toyo University, 5-28-20, HakusanBunkyo-ku,Tokyo 112-8606, Japan 3: The Research Institute of Economy,Trade and Industry, 1-3-1, KasumigasekiChiyoda-ku,Tokyo 100-8901, Japan

Publication date: 2013-05-01

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