Employment Protection Deregulation and Labor Shares in Advanced Economies

Abstract

This paper assesses the impact of job protection deregulation on the labor share in a sample of 26 advanced economies during the 1970-2013 period, using a newly constructed dataset of major reforms in this area. We employ a difference-in-differences identification strategy using two identifying assumptions grounded in theory-deregulation has larger effects in industries characterized by (i) a higher "natural" propensity to regularly adjust the workforce and (ii) a lower elasticity of substitution between capital and labor. We find significant negative effects of deregulation on the labor share, contributing to about a tenth of its observed decline in advanced economies.