Job Security Does Affect Economic Efficiency: Theory, a New Statistic, and Evidence from Chile

56 Pages Posted: 13 Dec 2006 Last revised: 30 Apr 2007

See all articles by Amil Petrin

Amil Petrin

University of Minnesota - Duluth; National Bureau of Economic Research (NBER)

Jagadeesh Sivadasan

University of Michigan, Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Survey Research Center

Date Written: December 2006

Abstract

The extensive empirical macro- and micro-level evidence on the impact of job security provisions is largely inconclusive. We argue that the weak evidence is a consequence of the weak power of statistics used, which is suggested by a dynamic theory of plant-level labor demand that we develop. This model speaks clearly on one issue: firing costs drive a wedge between the marginal revenue product of labor and its marginal cost. We examine changes in this gap as our test statistic. It is easy to compute and has a welfare interpretation. We use census data of Chilean manufacturing firms for the years 1979-1996 to look for real effects induced by two significant increases in the costs of dismissing employees. Similar to previous findings in other data, the traditional labor demand statistics provide little evidence of a negative impact from increases in firing costs. While we find no evidence that gaps increase for inputs that are not directly affected by firing costs, we find large and statistically significant increases in the mean and variance of the within-firm gap between the marginal revenue product of labor and the wage for both blue and white collar workers.

Suggested Citation

Petrin, Amil and Sivadasan, Jagadeesh, Job Security Does Affect Economic Efficiency: Theory, a New Statistic, and Evidence from Chile (December 2006). NBER Working Paper No. w12757, Available at SSRN: https://ssrn.com/abstract=949766

Amil Petrin (Contact Author)

University of Minnesota - Duluth ( email )

1049 University Drive
Duluth, MN 55812
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Jagadeesh Sivadasan

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

University of Michigan at Ann Arbor - Survey Research Center ( email )

Ann Arbor, MI
United States

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