Human Capital, Employment Protection and Growth in Europe

Using data for a large sample of manufacturing and service sectors in 14 EU countries, this paper shows that the value added and TFP growth rate differential between high and low human capital intensive industries is greater in countries with low than countries with high levels of employment protection legislation. We also find that such negative effect of EPL is slightly stronger for countries near the technology frontier, in the manufacturing sector 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.