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Labour Market Flexibility and Investment
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Dr Roxana Radulescu
Dr Martin Robson
Radulescu R, Robson M
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Empirical evidence is presented based on two independent measures of cross-national variations in labour market flexibility over time. The major finding is that there is evidence of a significant divergence in the relationship between labour market flexibility and investment between countries with relatively low levels of flexibility and those with more flexible labour markets. In the former, the finding is of a positive effect of flexibility on investment, while in the latter a negative relationship is observed. This discrepancy is highlighted in a comparison of the effects of flexibility on investment in the Euro-zone and non-Euro-zone economies. The findings suggest that in the context of policies aimed at promoting investment in fixed capital formation it might be possible to have ‘too much’ labour market flexibility.
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