Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98267
Authors: 
Caballero, Ricardo J.
Cowan, Devin N.
Engel, Eduardo M.R.A.
Micco, Alejandro
Year of Publication: 
2004
Series/Report no.: 
Center Discussion Paper 893
Abstract: 
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, others 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.
Subjects: 
Microeconomic rigidities
creative-destruction
job security regulation
adjustment costs
rule of law
productivity growth
JEL: 
E24
J23
J63
J64
K00
Document Type: 
Working Paper

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