2005) “Job Flow Dynamics and Firing Restrictions: Evidence from Europe”, ECB Working Paper No. 602

We exploit homogeneous firm level data of manufacturing and non-manufacturing industries to study the impact of firing restrictions on job flow dynamics across 14 European countries. Our results suggest that more stringent firing laws dampen the response of job destruction to the cycle, thus making job turnover less counter-cyclical. Moreover, stricter EPL reduces both the creation and destruction of jobs in declining sectors relative to expanding sectors, implying that faster trend growth attenuates the impact of firing costs on firm’s hiring and firing decisions. How does the reallocation of factors of production behave along the business cycle? Are there significant differences across countries? Which are the determinants of such differences? Following Davis and Haltiwanger’s (1990, 1992) seminal work, a large literature has emphasised the importance of labour reallocation and microeconomic heterogeneity for macroeconomic fluctuations. While the direction of causality is debatable,1 the study of the behaviour of job reallocation over the business cycle is fundamental in order to understand economic fluctuations. Moreover, even if reallo-cation is just a consequence of the business cycle, understanding the nature and timing of job reallocation remains crucial to design the appropriate policy responses t