Juan Guerra, Banco Central

Paper: “Labor Hoarding Policies Can Trigger Creative Destruction”

Abstract: In response to economic crises, firms face a trade-off between labor hoarding—retaining workers despite reduced demand—and labor shedding, which can improve efficiency through “creative destruction.” Employment protection policies, which subsidize labor costs to preserve employment relationships, are often criticized for impeding this reallocation. Using administrative microdata from a large-scale policy in Chile during the COVID-19 pandemic—which allowed firms to furlough workers at zero hours while maintaining the employment relationship—we show that such policies can, paradoxically, facilitate creative destruction. Firms used the subsidized suspension to selectively retain and recall higher-ability workers, as proxied by worker fixed effects estimated from Abowd-Kramarz-Margolis (AKM) wage regressions, while allowing lower-ability workers to separate. This selection mechanism led to measurable and persistent productivity gains at the firm level, demonstrating that employment protection policies can simultaneously preserve jobs and enable productivity-enhancing reallocation.