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Firm Size Distortions and the Productivity Distribution: Evidence from France

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  • Luis Garicano
  • Claire Lelarge
  • John Van Reenen

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 date 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.

Suggested Citation

  • Luis Garicano & Claire Lelarge & John Van Reenen, 2012. "Firm Size Distortions and the Productivity Distribution: Evidence from France," CEP Discussion Papers dp1128, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1128
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    More about this item

    Keywords

    Firm size; productivity; labor regulation; power law;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • J8 - Labor and Demographic Economics - - Labor Standards
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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