a column by Luc Laeven, Peter McAdam and Alexander Popov for VOX: CEPR’s Policy Portal
There are good arguments both in favour and against the idea that more labour market flexibility will deliver benefits to an economy during a downturn.
This column presents novel evidence on this question, using data from Spain during the 2008–09 credit crunch.
The results show that credit-constrained firms grow faster if they are subject to less strict firing and hiring restrictions, as long as they are technologically able to substitute labour for capital. The findings provide an argument in favour of more flexible labour laws.
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