Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?. Midwest Macroeconomics Meetings 2007, April 27-29, 2007, Cleveland, Ohio.

There is more resistance to layoffs in continental Europe than in the U.S. At the same time, there is some evidence that employed European workers are more productive than their American counterparts. We reconcile these two facts by proposing that some institutions, such as Employment Protection Legislation (EPL), induce workers to invest in and develop job specific skills, making them more productive and leading to costly displacement as these types of skills are lost upon separation from the employer. It is also well established that mobility patterns -flows in and out of unemployment or even movements from job to job, are reduced in continental Europe relative to the U.S. The possibility to invest in skill improvement introduces a complementarity between EPL and the investment decision: more stable matches increase the incentive to accumulate specific skills; but also more productive matches are broken less frequently; hence there is a “mutliplier” effect arising from this complementarity. To quantitatively assess all these propositions, we built a tractable asymmetric information matching model featuring all types of transitions out of employment: layoffs, quits to unemployment and job-to-job transitions. We find that EPL does induce workers to invest more in human capital and may help explain greater resistance to layoffs in Europe. We find that flows out of employment are indeed reduced by EPL. However, allowing for skill investment does not generate any strong multiplier due to the fact several new effects are at play keeping unemployment duration at a low level and thus putting downward pressure on the multiplier. The conclusion of all this may be that EPL matters for explaining specialization and low movements out of jobs, but that low movements out of unemployment may be better explained by other institutions such as unemployment benefits.