13.04.2026 New Working Paper | Labor Market Rigidity and Employment: Firm-level Evidence

New Working Paper | Labor Market Rigidity and Employment: Firm-level Evidence

In a new working paper, Matjaž Koman (University of Ljubljana), Lars Schaefer (Goethe Universität), Julia Udoieva-Wagner and Professor Rapp examine the effect of labor market rigidity on firms’ employment decisions in OECD countries using a rich firm-level panel dataset covering 164,048 firm-year observations. Exploiting intertemporal variation in country-level employment protection legislation (EPL), the authors document a trade-off. While stricter EPL reduces the output sensitivity of firms’ employment, it simultaneously lowers firms’ overall employment levels. Moreover, the evidence indicates that firms respond to increases in EPL by substituting labor with additional investment in net assets, particularly in labor-intensive industries. Overall, the findings suggest that the level of EPL materially affects firm behavior and that governments should carefully consider the associated trade-offs when designing labor market policies.

 You can access the working paper on SSRN.