Employment Protection, Worker Mobility, and Endogenous Growth

This study characterizes optimal labor-market policy in a multi-sector economy that joins endogenous growth, frictional worker reallocation, and human-capital accumulation on an input–output network.

Our growth engine is portable human capital: within-match training lifts the economy’s growth frontier, but because trained skill is carried into unemployment and priced in the worker’s outside option, it compresses the bilateral surplus that funds job creation. In contrast to productivity differences across sectors differences in growth potential push labor out of the higher-growth sector. The model speaks at once to the human-capital and diffusion theory of growth and the recent growth-through reallocation literature. To correct for worker-stealing and incumbent-match externalities - similar to those in Fukui and Mukoyama, 2025 in a growth context - the social planner needs to use a complex system of hiring, firing, training, on the-job search, unemployed switching, and schooling taxes/subsidies that we characterize.

We find that if on-the-job search merely reshuffles workers the planner subsidizes separations and taxes hiring; when mobility instead builds portable skill, the prescriptions reverse. The framework delivers a unified, network-aware account of when worker mobility is socially valuable and how employment-protection policy might respond in a theory of second best.

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