Employment protection, adjustment costs, and technology adoption

This paper examines how employment protection legislation shapes firm-level technology adoption across OECD countries using novel survey data. We document a negative association between employment protection legislation and the adoption of artificial intelligence and other restructuring-intensive technologies, while more modular digital technologies display weaker relationships with labor market institutions. The patterns are particularly pronounced among large incumbent firms, while younger and fast-growing firms exhibit higher adoption rates.

To interpret these patterns, we develop a general equilibrium model with heterogeneous firms in which workforce restructuring costs raise the productivity threshold for technology adoption. The model predicts heterogeneous firm responses: some adopters expand employment, others contract, and highly productive incumbents may optimally refrain from adoption when restructuring costs rise with scale.

The framework is extended to incorporate endogenous technology arrival and diffusion through both adoption by incumbent firms and entry of new firms implementing frontier technologies. The analysis highlights how labor market institutions can affect technology diffusion and, through this channel, influence incentives to develop and commercialize new technologies.