Do Labor Market Rigidities have Microeconomic Effects? Evidence from Within the Firm

Ross School of Business Paper No. 1069

American Economic Journal: Applied Economics, Vol.1, No. 2, pp. 88-127, April 2009

Posted: 1 Mar 2007 Last revised: 6 Jun 2013

See all articles by Francine Lafontaine

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Jagadeesh Sivadasan

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

Date Written: May 1, 2008

Abstract

We exploit a unique outlet-level dataset from a multinational chain with over 2,500 outlets in 43 countries to investigate the effects of labor regulations that protect employment. The dataset contains information on output, materials, and labor costs at a weekly frequency over several years, allowing us to examine the consequences of labor market rigidity at a much more detailed level than has been possible to date. We find that higher labor market rigidity is associated with significantly higher levels of hysteresis. We also find some evidence that labor costs are less responsive to sales revenue in more highly regulated markets.

Keywords: Severance pay, adjustment costs, labor flexibility, retailing

JEL Classification: J08, J23, K31, L51

Suggested Citation

Lafontaine, Francine and Sivadasan, Jagadeesh, Do Labor Market Rigidities have Microeconomic Effects? Evidence from Within the Firm (May 1, 2008). Ross School of Business Paper No. 1069, American Economic Journal: Applied Economics, Vol.1, No. 2, pp. 88-127, April 2009, Available at SSRN: https://ssrn.com/abstract=966331

Francine Lafontaine (Contact Author)

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
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University of Michigan at Ann Arbor - Department of Economics ( email )

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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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