Firms and Labor Market Regulation

What are firms' preferences over patterns of labor market regulation?  Despite much theorizing over the past decade about the preferences of firms vis-a-vis social policy and labor market regulation, we actually have very little evidence on firm preferences.  This paper tests asset-specificity theories about the determinants of employer preferences vis-à-vis social protection. Asset theories of social protection argue that variation in the nature of social protection across countries neatly reduces to variation in the skill requirements of firms. The micro-foundations of the claim—that the skill composition of a firm’s workforce drives the firm’s preferences over social policy—have not been subjected to rigorous testing, however. Drawing on insights from the finance literature, we derive a testable corollary of this claim: legal changes that extend (or retract) social protection will have a differing financial impact upon firms, depending upon the skill composition of their workforce. Using confidential administrative data from France, we employ an event study analysis to test whether, consistent with the theory, changes in social protection provisions result in abnormal stock returns to different types of firms.