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American Economic Review Vol. 106 No. 11 2016

Firm Size Distortions and the Productivity Distribution: Evidence from France

Luis Garicano1; Claire Lelarge2; John Van Reenen3

1 Department of Management, Department of Economics, and Centre for Economic Performance, London School of Economics, Houghton Street, London, WC2A 2AE, United Kingdom, and CEPR (e-mail: ) · 2 Banque de France, 46-2401 DGEI-DEMS-SAMIC, 75049 Paris Cedex 01, France, Centre for Economic Performance, and CEPR (e-mail: ) · 3 Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cambridge, MA 02139, CEPR, and NBER (email: )

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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 this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

DOI
10.1257/aer.20130232
Volume
106
Issue
11
Pages
3439-3479
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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