Recent empirical work has shown that the success of an economy depends largely on how successful it is in allocating inputs and outputs across businesses efficiently with minimum disruption and frictions. Reallocation of factors of production plays a major role in productivity growth and it is driven by technological and market forces, coupled with institutional factors. We examine the impact of institutions on allocative efficiency, job flows and wage structure, using longitudinal micro level databases.

First, we estimate the impact of state aid for the rescue and restructuring of firms in difficulty on productivity and allocative efficiency. We use treatment effects estimators allowing for selection on unobservables and exploit variables that affect the chances of getting aid before 2002, but not after, to identify this impact. The empirical analysis indicates that state aid hindered the efficient allocation of resources and prolonged the life span of aid-receiving firms.

Next, we assess the importance of technological factors that characterize different industries in explaining cross-country differences in job flows. We find that industry/technology and size factors explain a large fraction of the overall variability in job flows, but there remain significant differences in job flows that could reflect differences in business environment conditions. We use a difference-in-difference approach to examine the impact of regulations on worker hiring and firing. The empirical results suggest that stringent hiring and firing costs reduce job turnover and distort the patterns of industry/size flows.

Finally, we study the structure of wages and the importance of firm and person fixed effects in explaining the variance of log real hourly wages in Slovenia, using a longitudinal matched employer-employee database. Most significant changes in employment and wage setting policies occurred in 1991, but incomes policies still suppressed the growth of managerial wages until 1997. We find that this change brought about a change in the wage structure, with an increase in returns to education for the most educated workers. Our results also indicate that person fixed effects account for an overwhelming majority of variation in log real hourly wages, whereas firm fixed effects are not nearly as important.