When structural reforms of labor markets harm productivity. Evidence from the German IAB panel

Abstract We find firm-level evidence that removing labor market rigidities can harm productivity growth. This holds, in particular, in industries with a high ‘cumulativeness’ of knowledge, i.e., when accumulation of worker-embodied (and often ‘tacit’) knowledge from experience is important for innovative competencies. We conclude that there is a trade-off between the efficient allocation of scarce resources in a static neoclassical perspective and dynamic Schumpeterian efficiency, the latter requiring rigidities in labor markets that are valuable for innovation.