Human Capital, Employment Protection and Growth in Europe”

Using data for 51 manufacturing and service sectors for the period 1970-2005 in 14 EU countries, this paper shows that employment protection legislation has a negative effect on value added growth in more human capital intensive sectors, especially in the case of countries near the technology frontier and after the 1990s. We interpret these results suggesting that technology adoption depends on the skill level of the workforce and on the capacity of firms to adjust employment as technology changes: therefore, firing costs have a stronger impact in sectors where technical change is more skill-biased and technology adoption more important.