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Firm size distortions and the productivity distribution: evidence from France

Garicano, Luis, Lelargez, Claire and Van Reenen, John (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
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Journal of Economic Literature Classification System: 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
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Project and Funder Information:
Project IDFunder NameFunder ID
ES/M010341/1Economic and Social Research Councilhttp://dx.doi.org/10.13039/501100000269
UNSPECIFIEDInternational Growth CentreUNSPECIFIED
UNSPECIFIEDEuropean Commissionhttp://dx.doi.org/10.13039/501100000780
Date Deposited: 01 Jun 2016 14:55
URL: http://eprints.lse.ac.uk/66765/

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