Employment protection legislation, adjustment costs and cross-country differences in cost behavior

Central to the economic theory of sticky costs is the proposition that managers consider adjustment costs when changing resource levels. We test this proposition using employment protection legislation (EPL) provisions in different countries as a proxy for labor adjustment costs. Using a large sampl...

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Bibliographic Details
Published in:Journal of accounting & economics Vol. 55; no. 1; pp. 111 - 127
Main Authors: Banker, Rajiv D., Byzalov, Dmitri, Chen, Lei (Tony)
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.02.2013
Elsevier
Elsevier Sequoia S.A
Subjects:
1990-2008
Adjustment
Adjustment costs
Anpassungskosten
Arbeitnehmerschutz
Cost-benefit analysis
Costs
Economic theory
Employment
Employment law
Employment protection legislation
Industrialized nations
International comparisons
Labor adjustment costs
Labor costs
Labor law
Legislation
OECD
OECD-Staaten
Personalbeschaffung
Protection
Provisions
Sticky costs
Studies
Employment protection legislation
J30
D24
Labor adjustment costs
M41
L23
Sticky costs
ISSN:0165-4101, 1879-1980
Online Access:Get full text
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Summary:Central to the economic theory of sticky costs is the proposition that managers consider adjustment costs when changing resource levels. We test this proposition using employment protection legislation (EPL) provisions in different countries as a proxy for labor adjustment costs. Using a large sample of firms in 19 OECD countries during 1990–2008, we find that the degree of cost stickiness at the firm level varies with the strictness of the country-level EPL provisions. This finding supports the theory that cost stickiness reflects the deliberate resource commitment decisions of managers in the presence of adjustment costs. ► We develop and test the economic theory that can explain the pervasive empirical findings of sticky costs. ► If the theory holds, higher adjustment costs should increase stickiness. ► Employment protection legislation (EPL) strictness is a reliable empirical proxy for labor adjustment costs. ► In cross-country analysis for 19 OECD countries, stricter EPL is associated with higher stickiness, supporting the theory.
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ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2012.08.003