Labour market regulations and capital intensity

What is the impact of labour market regulations as measured by the OECD indicator of employment protection legislation (EPL) on capital and skill composition? Precisely, this study investigates the effects of changes in EPL on changes in four types of capital and three components of labour skill. They include construction, non-ICT, ICT, and Rand D capital components on the one hand, and low-, medium-, and highly-skilled labour on the other. Our analysis is grounded on a large country-industry panel dataset of fourteen OECD countries, and eighteen manufacturing and market service industries, from 1988 to 2007. It shows that strengthening EPL lowers ICT capital and, even more severely, R and D capital relative to non-ICT and construction capital; it also brings down low-skilled relative to highly-skilled workers' employment. These results suggest that structural reforms for more labour flexibility could have a favourable impact on firms' Rand D investment and hiring of low-skilled worker