Between-Firm Redistribution of Profit in Competitive Industries: Why Labor Market Policies May Not Work

Empirical studies document differences in firms' response to the introduction of various labor market policies. In particular, large and mature firms tend to participate more actively in targeted employment subsidy programs (under which firms receive subsidies for hiring disadvantaged workers). This paper offers an explanation for this phenomenon and argues that it might have important consequences for policy making. Namely, such behavior of firms may indicate that large and mature firms benefit from the introduction of a new subsidy program, while small and young firms incur indirect costs. In this case, the policy implicitly redistributes profit from young to mature firms and may discourage startups if the entry into the industry is competitive. The resulting decrease in the number of operating firms is likely to have a significant impact on the policy's outcomes. These effects become more pronounced as heterogeneity between young and mature firms increases.