Employment protection and the non-linear relationship between the wage-productivity gap and unemployment

Antonia López, Universite Paris Nord (Paris XIII)
José Ignacio Silva, Universitat de Girona

Abstract

This paper studies the relationship between the wage-productivity gap and unemployment in OECD countries during the last 25 years. In particular, we investigate whether differences in the employment protection across countries affect the link between these two variables. We show that the elasticity of unemployment with respect to the wage-productivity gap is nonlinear and it switches from a positive to a negative value for stricter employment legislation. From a theoretical point of view, we argue that this result is related to the a set of labour market reforms introduced in many OECD countries, which aected the relative strictness of the institutions