Firm size distortions and the productivity distribution: evidence from France

Garicano, Luis, Lelargez, Claire and Van Reenen, John ORCID: 0000-0001-9153-2907 (2016) Firm size distortions and the productivity distribution: evidence from France. American Economic Review, 106 (11). pp. 3439-3479. ISSN 0002-8282

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Abstract

We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies it to France where many labor laws start to bind on firms with 50 or more employees. Using population data on firms between 1995 and 2007, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. We find that the cost of these regulations is equivalent to that of a 2.3% variable tax on labor. In our baseline case with French levels of partial real wage inflexibility welfare costs of the regulations are 3.4% of GDP (falling to 1.3% if real wages were perfectly flexible downwards). The main losers from the regulation are workers - and to a lesser extent, large firms - and the main winners are small firms.

Item Type:	Article
Official URL:	https://www.aeaweb.org/journals/aer
Additional Information:	© 2016 American Economic Association
Divisions:	Economics Centre for Economic Performance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity J - Labor and Demographic Economics > J0 - General > J08 - Labor Economics Policies J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. K - Law and Economics > K3 - Other Substantive Areas of Law > K31 - Labor Law L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
Date Deposited:	01 Jun 2016 14:55
Last Modified:	13 Nov 2024 00:09
Projects:	ES/M010341/1
Funders:	Economic and Social Research Council, International Growth Centre, European Commission
URI:	http://eprints.lse.ac.uk/id/eprint/66765

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