It is commonly argued that labor market institutions such as employment protection worsen an economy’s performance and particularly so, if product markets become more competitive. Empirical evidence, however, has difficulties to detect a robust negative correlation between employment...

Collective dismissal costs are an important part of employment protection legislation (EPL) and make firms' exit more costly. We show in a model with step-by-step innovations that dismissal costs spur innovation if product markets are not too competitive: technologically more advanced firms...