Project in detail

The Costs of Firm Exit and Labour Market Policies: new Evidence from Europe

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This paper explores the factors which shape the re-employment prospects of displaced workers who lost their job due to business closure. While the "creative destruction" process - that is, the churning process of firms and jobs - is often welfare-enhancing, it will also necessarily entail some degree of job destruction, via the downsizing of inefficient incumbents and exit of failing firms, in order to accommodate the growth of productive firms. Thus, a key question is what happens to workers who lose their jobs due to this process and what are the policies that minimise the costs of worker displacement? Accordingly, this paper exploits the SHARE retrospective panel of workers in 13 European countries over the period 1986-2008 to explore the factors which shape the re-employment prospects of workers displaced due to business closure. The results suggest that higher spending on active labour market policies (ALMPs) can aid the re-employment prospects of the unemployed, particularly those displaced by business closure. On the contrary, there is evidence of a negative (and sizable) impact of passive labour market policies. Finally, the effectiveness of ALMPs is significantly enhanced by lower entry barriers in product markets, likely reflecting the stimulatory effects of such reforms on labour demand. This paper has two external coauthors: Dan Andrews (Economics Department, OECD) and Alessandro Saia (Dept. of Economics, University of Lausanne). The paper has been submitted for publication to a peer-reviewed economics journal.

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