Do firms make greater use of training and temporary employment when labor adjustment costs are high?

Pieree, Gaëlle; Scarpetta, Stefano Article Do firms make greater use of training and temporary employment when labor adjustment costs are high? IZA Journal of Labor Policy Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Pieree, Gaëlle; Scarpetta, Stefano (2013) : Do firms make greater use of training and temporary employment when labor adjustment costs are high?, IZA Journal of Labor Policy, ISSN 2193-9004, Springer, Heidelberg, Vol. 2, pp. 1-17, https://doi.org/10.1186/2193-9004-2-15 This Version is available at: https://hdl.handle.net/10419/92345 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Gaëlle Pierre 1 and Stefano Scarpetta 2* * Correspondence: [email protected] 2 OECD,2,rueAndréPascal,Cedex16, F-75775, Paris, France Full list of author information is available at the end of the article Abstract In this paper, we present evidence on how employers in developing and emerging economies perceive employment regulations and react to them. We use harmonized surveys of about 10,800 firms around the world, supplemented by indicators of the stringency of employment protection that summarize detailed aspects of the labor legislation. We find that firms facing tight employment protection invest more in training, but also use temporary contracts to enhance labor flexibility. Using a difference-in-difference approach to control for unobservable characteristics, we find that small firms and those in sectors characterized by greater job reallocation are the most directly affected by employment protection. JEL codes: J23, J65, K31 Keywords: Employment protection indicators; Firm surveys; Training; Temporary employment 1. Introduction Economists and policy makers have long debated the effects of hiring and firing regulations on workers’and firms’behavior. Policy intervention in this area is clearly justified by the need to protect workers from arbitrary actions and the fact that imperfections in financial markets limit their ability to insure themselves against the risk of dismissal (see e.g. Pissarides 2010; Blanchard and Tirole 2004). There could also be efficiency considerations to the extent hiring and firing regulations promote long-lasting work relationships that encourage firms’investment in human capital (see e.g. Akerlof 1984; Piore 1986). However, as with the majority of labor regulations, onerous employment protection legislation (EPL) can have negative effects on labor reallocation and allocative efficiency. By raising labor adjustment costs, employment protection regulations tend to reduce job destruction but also job creation (Bertola 1992) thereby weakening the ability of firms to take advantage of the opportunities offered by new technologies and access to new markets that often require a change in the skill composition of the workforce and, overall, hindering the required reallocation of labor from less to more productive activities. This is all the more important as many countries, including a growing number of developing and emerging economies, have introduced reforms in their labor regulations in the past years in an attempt to promote labor market adaptability and job creation. © 2013 Scarpetta and Pierre; licensee Springer. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 http://www.izajolp.com/content/2/1/15 Several models predict that employment protection reduces gross job flows (e.g. Bertola 1992; Hopenhayn and Rogerson 1993; Koeniger and Prat 2007) and there is a growing empirical literature supporting this prediction (from the original work of Bentolila and Bertola 1990 and Nickell and Layard 1999, to the most recent contributions at the industry and firm-level by Micco and Pagès 2008; Haltiwanger et al. 2008, 2013; Bassanini et al. 2010). 1 At the same time, however, it is not clear whether onerous employment protection legislation should lead to a lower equilibrium level of employment. Hopenhayn and Rogerson (1993), using a general equilibrium model with entry and exit of firms, show that a tax on job destruction can reduce employment rate significantly. However, Alvarez and Veracierto (2001), extending their model to include frictions and imperfect insurance markets, suggest that severance payments may be welfare improving insofar as the reduction in firms’layoffs and stronger search efforts by the unemployed reduce unemployment enough to compensate for lower consumption levels due to higher costs for firms. Not surprisingly, the cross-country empirical literature does not offer clear cut evidence of the impact of EPL on employment and unemployment (see Addison and Teixeira 2003 for a review of the literature). This paper contributes to this debate by presenting empirical evidence on how employers use strategies to overcome the potential costs associated with employment regulations. In particular, we assess whether employers tend to hire more temporary workers when employment regulations on permanent contracts are constraining; or whether they invest more in training to enable their existing workforce to adjust to new technologies, instead of changing the skill composition of the workforce by recurring to the external labor market. Our data are drawn from surveys of employers conducted by the World Bank in the past few years (see the Enterprise Surveys, World Bank 2004a). Our sample includes 10,800 firms in 44 developing and emerging economies. We supplement these data with indicators of the stringency of employment protection legislation constructed on the basis of detailed aspects of the labor legislation for about 140 countries around the world over the same period (Doing Business Database, World Bank 2004b; Botero et al. 2004). To anticipate our results we observe that de jure employment regulations and perceptions of regulations vary significantly across developing and emerging economies and affect firm’s behavior in terms of provision of training and use of temporary employment. When employment protection for permanent workers is relatively strict, firms tend to use training to accommodate the workforce to the needs of new technologies, but are also more likely to use temporary employment to enhance labor flexibility. 2 The impact of regulations on firms’behavior also varies a lot depending on salient firms characteristics. Using a difference-in-difference approach to control for unobservable country and industry-specific factors, we find that small firms and those in sectors characterized by greater job reallocation are the most directly affected by regular contracts regulations. The paper is organized as follows. In Section 2 we review the theoretical and empirical literature on the impact of strict employment protection legislation on the composition of labor demand and training strategy and report on the limited evidence available for developing countries. This provides the motivation of our study and guidance for how to model these issues and analyze them empirically. In Section 3 we present the micro Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 2 of 17 http://www.izajolp.com/content/2/1/15 data used in our empirical analysis as well as the indicators of Employment Protection Legislation, while in Section 4 we discuss the empirical model of the behavioral responses of employers to EPL. Section 5 discusses the empirical results while Section 6 provides the concluding remarks. 2. Employment protection, training and temporary employment By raising labor adjustment costs, strict employment protection legislation is likely to push firms towards two main strategies: make greater use of temporary employment to increase the overall adaptability of the workforce to changes in demand and/or re-train their internal workforce. Facing greater integration in the global economy and rapid technological changes, many developed and developing countries have eased regulations on temporary contracts. They have extended the range of jobs that can be offered on a temporary basis, prolonged the maximum cumulated duration of contracts and allowed Temporary Work Agencies (TWA) to intermediate between demand and supply (OECD 2008, 2013). The share of temporary employment has increased in many countries, in some cases to approach one-third of the total workforce (as in Japan and Spain). In our survey data, about 45% of all firms declare to use temporary workers. Evidence from France, Spain, Argentina, Peru, and Colombia also suggests that the asymmetric liberalization of temporary contracts, while leaving in place strict regulations for regular contracts, has led to significant shifts of labor demand in favor of temporary employment. In Argentina and Spain the liberalization of temporary employment was partially reversed after a few years because of the large expansion of temporary employment and, in Spain, net job creation really picked up only after the government reformed regular contracts in the mid-1990s. In Japan, non-regular employment increased dramatically during the lost decade of the 1990s to promote adaptability of labor among firms but it has been associated with greater dualism and a trend decline in labor productivity. 3 Training the internal workforce is another option to adapt the workforce without recurring to possibly onerous firing costs (e.g. Cappelli 2000; Young 2003). However, training is a valid alternative to replacing workers through firing and re-hiring only under certain conditions. In particular, the training option is particularly viable if wages are fairly compressed because there is a greater wedge between productivity gains through training and the wage. 4 The combination of wage compression and high labor adjustment costs tends to favor a process of competence accumulation based on firm-supported training and on-the-job learning. In this context, training may compensate for the negative effect that employment protection legislation may have on the optimal allocation of workers (as illustrated in the case of Germany in Acemoglu and Pischke 1998). In addition, firms may use training to make sure workers have adequate skills to be able to adopt flexible work practices (Gittleman et al. 1998; Belot et al. 2007; and Acharya et al. 2010). 5 In turn, internal flexibility is a strategy which can be a substitute as well as a complement to a strategy of involuntary turnover within firms (Cappelli and Neumark 2001). 3. The data For our empirical analysis, we rely on two main sources of data. First, we use the detailed information on labor legislations in about 140 countries that is available in Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 3 of 17 http://www.izajolp.com/content/2/1/15 the World Bank Doing Business Database. 6 On the basis of this information, we construct synthetic indicators of the stringency of employment protection legislation by country. 7 Second, we use firm-level information on firm characteristics, their perceptions about employment regulations and their responses in terms of employment composition (temporary vs. permanent) and provision of training from the World Bank Investment Climate surveys. 8 Measuring the stringency of employment protection legislation (see Pierre and Scarpetta (2004), World Bank (2004c) for more details) Regulation of permanent employment We focus on the following variables to characterize individual protection against dismissal for workers with regular contracts: Procedural requirements. They refer to the process that firms have to follow from the decision to lay off a worker to the actual termination of the contract. They include: 1) the grounds for dismissal; 2) the delay before the notice of dismissal can start; 3) whether a third party must be notified or consulted; and whether dismissal cannot proceed without the approval of a third party; 4) whether the law mandates retraining or replacement prior of dismissal; 5) whether there are priority rules to dismissal or layoffs; 6) and whether there are priority rules applying to re-employment. Notice period required by law for the dismissal of one redundant worker in manufacturing with twenty years of tenure. Severance payment (including mandatory indemnity) for the dismissal of one redundant worker in manufacturing with twenty years of tenure. Regulation of temporary employment Indicators of the stringency of EPL for temporary contracts refer to: 1) the “objective” reasons under which they could be offered; 2) the maximum cumulated duration of a contract. Detailed indicators for the different components of employment protection have been first normalized from 0 to 1 from the least to the most restrictive in the country sample. They have then been aggregated into two synthetic indicators for regular and temporary contracts and an overall indicator of EPL. The aggregation process follows previous studies (e.g. OECD 2008, 2013) and is largely based on simple averages of detailed regulatory aspects (see Additional file 1 for details). The two synthetic indicators pass simple validation tests: for example they correlate well with similar indicators constructed by the OECD for its member countries, which are arguably the most complete measures available. 9 Our synthetic indicators of the stringency of employment protection legislation are presented in Figure 1 aggregated at the regional level. Bearing in mind that there are also large variations within each region (see Pierre and Scarpetta 2004), the Figure suggests that the European and Central Asian region –which includes all centralplanned economies -- South Asia and Latin America have the highest incidence of countries with fairly rigid regulations on regular contracts, often above the OECD average. Many low-income countries also have employment protection legislation that Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 4 of 17 http://www.izajolp.com/content/2/1/15 mimics or even exceeds that of industrial economies—even if the latter have approached these conditions only gradually during their process of development. 10 Employers’perception of the stringency of employment protection legislation Micro level data on firm characteristics, employers’perception about labor regulations and their behavior are drawn from the Investment Climate Survey (ICS) conducted by the World Bank (World Bank 2004b). Overall, we have an estimation sample of a crosssection of 44 developing and transition countries for which we have both regulatory indicators of regulations and survey data. 11 The aim of the ICS is to provide quantitative data on investment climate which are comparable at the international and regional levels. The survey is normally carried out under the auspices of national stakeholders, which vary depending on the country. Because the priorities of these surveys vary across countries, ICS are not all exactly the same. However, in order to make these as comparable as possible, a set of criteria were defined, in particular a set of core questions –with the same wording - are asked in the same way in all countries. 12 From the ICS database we have extracted responses on a specific question concerning labor regulations: “Please tell us if any of the following issues are a problem for the operation and growth of your business. If an issue poses a problem, please judge its severity on a four-point scale”. 13 Eighteen issues are proposed including labor regulations. 14 The two other variables of interest are whether firms hire temporary workers (based on a constructed dummy variable which equals 1 if firms employ temporary workers, 0 otherwise); and whether firms provide training to their workers (based on the question “Do you offer formal (beyond “on-the-job”) training to your permanent employees?”). Figure 2 shows how perceptions vary according to firms’characteristics and regions. Innovating firms and medium and large firms appear to perceive labor regulations as a greater obstacle to business than other firms. Around 7 percent of firms in Eastern Europe and Central Asia up to nearly 30 percent in Middle East and North Africa report that labor regulations are a major or very severe obstacle to doing business. A 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Sub-Saharan Africa East Asia and the Pacific Eastern Europe and Central Asia Industrial Countries Latin America and the Caribbean Middle East and North Africa South Asia temporary employment regulations regular employment regulations Figure 1 Strictness of temporary and regular employment regulations –regional averages. Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 5 of 17 http://www.izajolp.com/content/2/1/15 further 14 percent of firms in the former region and 21 percent in the latter report that they labor regulations are a moderate obstacle. 15 4. Modeling firms’behavior Our empirical investigation is aimed at testing the assumption that firms that face more stringent employment legislation tend to adjust the structure of their employment in ways that differ from firms that face more flexible legislations. In other words, employment regulations, whether or not they have an impact on the level of employment, are going to have a direct impact on the composition of employment, on the type of staff and contracts that are used by firms. In particular, we look at strategies that firms can use to overcome constraining employment regulations, and that affect the composition and the quality of employment. These strategies are: making greater use of training to adapt the workforce to changes in technology instead of resorting to the external labor market (an improvement in the quality of jobs); and using of temporary employment to increase labor flexibility when regulations of regular contracts are too constraining (a worsening of employment contracts terms). Whether or not employment regulations are constraining depends on a host of factors, besides the strictness of the regulation itself. In particular, the impact of regulations on employment is going to depend on the way they are implemented, as well as on the characteristics of firms. 0 10 20 30 40 50 Non-innovators Innovators Moderate obstacle Major obstacle 0 10 20 30 40 20< employees 20 to 100 100 or more Moderate obstacle Major obstacle 0 10 20 30 40 50 60 Sub-Saharan Africa East Asia & Pacific Eastern Europe & Central Asia & Caribbean Middle East & North Africa South Asia Moderate obstacle Major obstacle 50 Latin America Figure 2 Proportion of firms which report labor regulations to be a major/very severe and moderate obstacle by firms’characteristics and region (%). Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 6 of 17 http://www.izajolp.com/content/2/1/15 Firms’perceptions regarding labor regulations implicitly measure the combined stance of de jure regulations, and their enforcement, and the characteristics of firms. Pierre and Scarpetta (2006) show that there is a significant cross-country correlation between de jure and perception indicators of the stringency of employment protection legislation, once they control for firm characteristics, as well as for income per capita and other basic country characteristics that tend to be correlated with the degree of enforcement of laws and regulations. 16 These two types of measures therefore show consistency and can both be used as complementary indicators of EPL. We therefore investigate the issue at hand in two ways. First, we estimate the link between perceptions and firms behavior. Second, we take a difference-in-differences approach, comparing the behavior of different firms across different levels of the employment regulation index. Basic estimation model The propensity to provide training or use temporary workers is not observed, we only observe whether firms have actually provided training or employed temporary workers. Moreover, the use of temporary instead of permanent employment and the provision of training are not independent choices for firms. Depending on the regulatory environment in which firms operate, the underlying technology of the firm and its size and other salient characteristics, training may be an alternative to the use of temporary workers –e.g. when training allows skills adjustment which can alternatively be obtained by recruiting temporary workers, or even as a complement, when it is difficult to recruit skilled workers on a temporary basis. We therefore test the hypothesis that these two decisions are correlated and use a bivariate probit model that considers training provision and the use of temporary employment simultaneously. In other words, we model the reaction of firms in a two-equations model: y1¼X1β1þε1;y1¼1ify1>0;0otherwise ð1Þ y2¼X2β2þε2;y2¼1ify2>0;0otherwise Where y 1,2 *are two unobservable latent variables representing the propensity to provide training and employ temporary workers, and y 1,2 the observable reactions of firms, namely providing training and employing temporary workers. The random error terms, ε 1,2 are normally distributed with E[ε 1 ]=E[ε 2 ]=0,and var[ε 1 ] = var[ε 2 ]=1but they could be correlated, i.e. cov[ε 1 ,ε 2 ]=ρ. If a Wald test shows that ρis not statistically different from zero then the two models can be estimated separately as standard probits. If however ρis significantly different from zero and the log-likelihood of the bivariate estimate is significantly less than the joint binomial probit log-likelihoods, then y 1 and y 2 are joint processes (Bertaut 1998; Greene 2003). The Wald tests all show that the two processes considered here are indeed correlated (they reject the hypothesis that ρ is equal to zero). We therefore present results only for the bivariate probit models. Specifications We first include the degree to which firms find employment regulations to be an obstacle to their business operation and growth prospect as the independent variable of interest Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 7 of 17 http://www.izajolp.com/content/2/1/15 (Table 1 below); second, we use our de jure index of labor regulations (Table 2). As mentioned above, by using this index, we can disentangle the impact of regulations for temporary and regular contracts. This is interesting because they are likely to have different effects on the provision of training and the use of temporary workers. The other control variables are as follows in both specifications: (i) firms’characteristics (age, size of firm, industry, whether the firm has upgraded its products or production line in the previous three years and ownership); and (ii) country’s income level. Table 3 presents descriptive statistics of all the variables. Limited inference can be made from a cross-country analysis, as other country-specific factors may be influencing the results. We therefore use a difference in differences approach whereby we use an interaction of our measure of employment legislation with: (i) the size of firms; and (ii) the degree of job flow “required”for the particular sector of the firm. With the former interaction, we analyze whether different types of firms, which are affected differently by given employment regulations (see Pierre and Scarpetta 2004), react differently. Small firms, which are the least affected by regulations, can be taken as the reference category and the approach finds out whether larger firms have a different behavior at given levels of employment regulation index. Moreover, as shown by Haltiwanger et al. (2008), firms in industries that have different propensity to job reallocation tend to be affected differently by labor regulations. We take this into account by interacting the indicator of employment regulations with the industry-size job reallocation propensity indicator drawn from US data. Under the assumption that regulations in the labor and product markets in the United States are among the least restrictive, variation in job reallocation across industry-size cells in the United States should proxy for the technological and market driven differences in job reallocation in the absence of policy-induced adjustment costs. If we also make the additional assumption that these technological and market driven differences in the demand for job reallocation carry over to other countries, we can test whether firms belonging to different industry-size cells with different propensity for job reallocation react differently to employment regulations that raise adjustment costs. In both cases, the difference-in-difference approach allows to control for country and industry-size effects, thereby minimizing problems of omitted variable bias and other misspecifications. Clustering Including employment protection legislation, a national level variable, in our models means that standard errors can be seriously biased downwards (see Moulton 1990). This is because standard errors are likely to be correlated for observations within each country, especially when the explanatory variable is auto-correlated over time and/or across different units within one country. All the estimations of this paper therefore assume that observations are independent across countries, but not necessarily across firms in the same country. In addition, the estimations assume that observations may not be identically distributed. 17 5. Do firms use training and temporary employment to overcome strict EPL? Before looking at the impact that labor regulations have on the behavior of firms, it is interesting to review how this behavior changes according to firms’characteristics. The Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 8 of 17 http://www.izajolp.com/content/2/1/15 and United States. The correlation between our weighted index for overall employment regulation with the relevant overall OECD index is statistically significant at 1 per cent level (correlation coefficient= 0.82). 10 Indeed, while one might have expected a positive relation between the level of mandated employment protection and income across countries (i.e. employment protection is a normal good), the relationship is in fact weakly negative across our sample of countries. 11 Sample of 43 countries (Tables 1, 2 and 3): Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Brazil, Bulgaria, Cambodia, China, Croatia, Czech Republic, Ecuador, El Salvador, Estonia, Georgia, Guatemala, Honduras, Hungary, Indonesia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, FYR, Mali, Moldova, Nicaragua, Oman, Philippines, Poland, Romania, Russian Federation, Serbia and Montenegro, Slovak Republic, Slovenia, South Africa, Syrian Arab Republic, Tanzania, Thailand, Turkey, Ukraine, Uzbekistan, Zambia. In addition, Tajikistan is in the sample for the model with perceptions, and Nepal is in the sample for the model with de jure regulations. 12 These common questions constitute a well-tested product of past surveys having been pooled and consolidated from instruments of FACS, WBES and RPED surveys. Together they constitute 50 to 60 percent of the full survey instrument, the rest being items generating information for analyzing more specialized policy issues. 13 Where 0 = no obstacle, 1 = minor obstacle, 2 = moderate obstacle, 3 = major obstacle, 4 = very severe obstacle. For our purpose, we merge responses 3 and 4 into the category “major”. 14 The eighteen issues are the following: Telecommunications, electricity, transportation, access to land, tax rates, tax administration, custom and trade regulations, labor regulations, skills and education of available workers, business licensing and operating permits, access to financing, cost of financing, economic and regulatory policy uncertainty, macroeconomic instability, corruption, crime, theft and disorder, anti-competitive or informal practices, and legal system/conflict resolution. 15 Comparing the characteristics of this dataset with another survey (with a larger number of countries, including industrial countries): the World Business Environment Survey (World Bank 2000), we have found that, despite the different country coverage, they do not differ substantially. For example, close to 70 percent of respondents in WBES (60 percent in ICS) reported that labor market regulations represented an obstacle (minor, moderate, major) to their operation and expansion. Around 16 percent report that these regulations are a major obstacle to the operation and growth of their business in ICS (14 percent in WBES). 16 In particular, Pierre and Scarpetta (2006) found that medium and large firms are the ones most severely affected. This is probably because in many countries where enforcement of regulations is limited small firms do not comply, remaining invisible to regulators and inspectors. By contrast, larger firms are visible to the authorities and thus unable to avoid regulations. Moreover, firms that have upgraded their production process or their products are more likely to face severe constraints from strict employment protection legislation. This suggests the importance of employment regulations for the adoption of new technology and potentially long-term growth. 17 The cluster adjustment made to the variance-covariance matrix is standard and described in Rogers (1993) and Williams (2000). Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 15 of 17 http://www.izajolp.com/content/2/1/15 18 This shows that what matters for the decision to provide training and using temporary workers is the stringency of the regulations affecting regular workers, as should be expected. This may also be due to the fact that our indicators for temporary EPL are limited and do not cover certain aspects of the regulatory system (e.g. they do not consider temporary work agencies and procedural inconveniences for setting up a temporary contract). 19 Pierre and Scarpetta (2006) find that large firms are more likely than small firms to report being constrained by labor regulations when these are less flexible. 20 The predicted probability that firms that require high labor turnover (highest value of index) provide training increases from 17 percent to 68 percent as the index of regular EPL goes from its minimum value to its maximum value, while for firms that require low labor turnover (Lowest value of index), this probability goes from 63 percent to 75 percent. 21 We also tried adding changes in employment in previous years –this variable is of course endogenous because it is likely to be highly correlated with current changes in employment which depend on the choice to provide training or use temp workers -- and found that the effect is generally not statistically significant in the training equation while it is statistically significant in the temporary employment equation; in the latter the inclusion of previous changes in employment does not affect the EPL results of the difference-in-difference using firm size but does reduce the statistical significance of the results using the difference-in-difference with US job flows. 22 Full results are available from the authors. Additional file Additional file 1: Construction of employment protection legislation indexes. Competing interests The IZA Journal of Labor Policy is committed to the IZA Guiding Principles of Research Integrity. The authors declare that they have observed these principles. Acknowledgements For helpful comments we are grateful to an anonymous referee, Gordon Betcherman, Alan Gelb, Mary Hallward- Driemeier, John Haltiwanger, Adriana Kugler, Carmen Pagés, Vijaya Ramachandran and Warrick Smith, and participants at two World Bank seminars and at the 2nd Joint World Conference of the EALE and SOLE in San Francisco. Gaëlle Pierre was a consultant at the World Bank at the time of writing. The views expressed in this paper are those of the authors and should not be held to represent those of the OECD, the World Bank or their member countries. Responsible editor: Juan F Jimeno Author details 1 World Bank, 1818 H Street NW, 20433, Washington, DC, USA. 2 OECD, 2, rue André Pascal, Cedex 16, F-75775, Paris, France. Received: 8 July 2013 Accepted: 2 September 2013 Published: 25 October 2013 References Acemoglu D, Pischke J-S (1998) Why Do firms train? theory and evidence. Quarterly Journal of Economics 113:79–119 Acemoglu D, Pischke J-S (1999) Beyond Becker: training in imperfect labor markets. Economic Journal 109:F112–F142 Acharya VV, Ramin Baghai R, Krishnamurthy Subramanian V (2010) Labour laws and innovation. NBER, Cambridge, MA. Working Paper Series, No. 16484 Addison JT, Teixeira P (2003) The economics of employment protection. Journal of Labor Research, Transaction Publishers 24(1):85–129. January Akerlof GA (1984) An Economist’s book of tales. Cambridge University Press, Cambridge Alvarez F, Veracierto M (2001) Severance payments in an economy with frictions. 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European Economy Economic Papers 186, European Commission, Brussels, Belgium doi:10.1186/2193-9004-2-15 Cite this article as: Pierre and Scarpetta: Do firms make greater use of training and temporary employment when labor adjustment costs are high? IZA Journal of Labor Policy 2013 2:15. Pierre and Scarpetta IZA Journal of Labor Policy 2013, 2:15 Page 17 of 17 http://www.izajolp.com/content/2/1/15