Assessing the impact of labour market policies on productivity: a difference-in differences approach

Abstract

The impact of four labour market policies - employment protection legislation, minimum wages, parental leave and unemployment benefits - on productivity is examined here, using annual cross-country aggregate data on these policies and industry-level data on productivity from 1979 to 2003. We use a 'difference-in-differences' framework, which exploits likely differences in the productivity effect of policies in different industries. Our identifying assumption is that a specific policy influences worker or firm behaviour, and thereby productivity, more in industries where the policy in question is likely to be more binding than in other industries. The advantage of this approach is twofold. First, as in standard cross-country analysis, we can exploit the cross-country variation of policies. Second, in contrast with standard cross-country analysis, we can control for unobserved factors that, on average, are likely to have the same effect on productivity in both policy-binding and non-binding industries.