Employment protection legislation and catching-up

After World War II (WW II), productivity growth in Europe and Japan was driven by catching up with the US. Institutions in Europe were different too and well suited for economic growth through imitation and adaptation of the technology to local circumstances. Catching up is, however, a self defeating process. It ends when the technology frontier is attained or when in case of conditional convergence institutions set a limit to the process of catching up. Once this situation is reached, the existing institutions may no longer be appropriate. Regression analysis on a panel of 21 Organization for Economic Cooperation and Development countries reveals that Employment Protection Legislations (EPL) had a positive impact on productivity growth in the period of rapid convergence in the sixties and seventies. However, from the eighties onwards, the total effect of EPL on labour productivity growth was negative.