Employment protection and investment opportunities

We examine the impact of employment protection legislation (EPL) on individual firms' growth opportunities, as measured by Tobin's q. On the one hand, by increasing job security, EPL spurs innovation effort. Yet that boost only occurs in firms with little comparative advantage at original innovation. The impact on q is therefore negligible. On the other hand, EPL increases restructuring costs and thereby reduces the firms' operating and financial flexibility. EPL-induced loss of flexibility has a strong negative effect on q. The evidence shows that scaling down EPL has stimulated growth opportunities internationally