Labor Market Rigidity and Productivity Growth

Empirical studies investigating the relationship between productivity perform-ance and labor market rigidity have generated a negative result. In this paper we try to provide a theoretical explanation for this empirical result. In doing so, we construct a no-shirking model of innovation-based growth and investigate the im-pact of a set of labor market reforms aimed at reducing labor market rigidities. We focus on the steady-state equilibrium and \u85nd that a negative relationship between growth and labor market rigidity exists. The economic explanation of this result is that the presence of moral-hazard in the employer-employee relationship makes the productivity growth of the economy (via its innovation intensity) very sensitive to the level of the e ¢ ciency-wage o¤ered by manufacturing