Employment Protection Laws and Privatization

Is privatization in a country related to the stringency of its employment protection laws (EPL) – and, if so, how? We address this question using privatization deals in fourteen European countries over three decades and all the changes in EPL within a country. Using traditional difference-in-difference tests exploiting major changes and generalized difference-in-difference tests for the entire sample, we find that stringent EPL discourage privatization in a country. For identification, we use two sets of triple-difference tests that control for all country-level omitted variables using fixed effects for each (country, year) pair. First, using cross-sectional differences across industries within a country, we find that the effect of EPL on privatization is disproportionately greater in industries where separation rates and relocation rates are higher. Second, using productivity measures for U.S. industries as an instrument, we find that the effect of EPL on privatization is disproportionately more in less productive industries.