Does employment protection inhibit technology diffusion?

This work explores the relationship between employment protection policies and technology diffusion. An examination of cross-country data uncovers a strong negative relationship between the extent of employment protection and the diffusion of information technology. A general equilibrium, vintage capital model is then developed that accounts for the long run relationship between employment protection and diffusion. The model economy is characterized by constant job and establishment turnover, with such turnover depending partly on the process of technological change. It is capable of reproducing a number of statistics that characterize job and establishment turnover in the US economy. Employment protection suppresses both entry and adoption and delays exit, retarding diffusion as observed in the data. Additionally, the effect of industrial subsidies on diffusion is explored. Income subsidies substantially change the structure of turnover by delaying obsolescence, and have a detrimental effect on output and welfare. Capital subsidies accelerate diffusion but have a large and negative impact on output and welfare, even though their target is the encouragement of investment in productivity. An examination of data on industrial subsidies offers some support for these predictions.