How Much Do Labor Market Institutions Constrain Firm Behavior? Evidence from the Fall of the Berlin Wall

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 18.12.2007, 12:15 - 13:30


Presentation by 

Douglas Frank (INSEAD)


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.

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