Labor market institutions that safeguard workers interests are frequently criticized on the grounds that they limit managers ability to manage, i.e., to respond to changes in the firm's external environment. I study how firms with different labor market institutions respond to a migratory labor supply shock, using East-West internal migration in Germany after the fall of the Berlin Wall. To control for endogenous determinants of migration in the receiving regions in West Germany, I instrument county-level migration data with distance to, and labor market conditions in, the sending regions in East Germany. Using the NIFA panel data set covering German machinery & equipment (Maschinenbau) establishments in the years 1990-98, I show that migration increased employment, but the employment response varied widely depending on the institutional regime. Collective bargaining had little apparent e¤ect on employment growth, whereas works councils appear to have entirely suppressed it. Furthermore, I find broad evidence that institution-related differences in employment growth are partly driven by migration-induced outsourcing to establishments with no institutional affiliations. |
