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Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement

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Author Info

  • Almeida, Rita K.

    ()
    (World Bank)

  • Susanli, Z. Bilgen

    ()
    (Isik University)

Abstract

This paper examines how stringent de facto firing regulations affect firm size throughout the developing world. We exploit a large firm level dataset across 63 countries and within country variation in the enforcement of the labor codes in countries with very different de jure firing regulations. Our findings strongly suggest that firms facing a stricter enforcement of firing regulations are on average smaller. We interpret this finding as supportive of the fact that more stringent de facto firing regulations tend to reduce average employment. We also find robust evidence that this effect is stronger for more labor intensive manufacturing firms, especially those operating in low-technology sectors. Evidence also shows that this negative correlation does not hold in countries with a very weak rule of law.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6006.

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Length: 42 pages
Date of creation: Oct 2011
Date of revision:
Publication status: published in: Review of Development Economics, 2012, 16 (4), 540–558
Handle: RePEc:iza:izadps:dp6006

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Keywords: firing regulations; enforcement; developing countries; micro data; labor markets;

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References

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  1. Ricardo J. Caballero & Kevin N. Cowan & Eduardo M.R.A. Engel & Alejandro Micco, 2004. "Effective Labor Regulation and Microeconomic Flexibility," NBER Working Papers 10744, National Bureau of Economic Research, Inc.
  2. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, . "What Determines Firm Size?," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Abidoye, Babatunde & Orazem, Peter F. & Vodopivec, Milan, 2009. "Firing cost and firm size : a study of Sri Lanka's severance pay system," Social Protection Discussion Papers 50671, The World Bank.
  4. Carmen Pagés-Serra & Reyes Aterido & Mary Hallward-Driemeier, 2007. "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms," Research Department Publications, Inter-American Development Bank, Research Department 4559, Inter-American Development Bank, Research Department.
  5. James E. Pesando, 1982. "Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons," NBER Working Papers 0956, National Bureau of Economic Research, Inc.
  6. Tito Boeri & Juan F. Jimeno, . "The Effects of Employment Protection: Learning from Variable Enforcement," Working Papers 2003-12, FEDEA.
  7. International Monetary Fund, 2005. "Trade Costs and Location of Foreign Firms in China," IMF Working Papers, International Monetary Fund 05/55, International Monetary Fund.
  8. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number heck04-1.
  9. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, Elsevier, vol. 15(3), pages 482-511, June.
  10. Alejandro Micco & Carmen Pagés-Serra, 2004. "Employment Protection and Gross Job Flows: A Differences-in-Differences Approach," Research Department Publications, Inter-American Development Bank, Research Department 4365, Inter-American Development Bank, Research Department.
  11. Haaland, Jan I. & Wooton, Ian, 2003. "Domestic Labour Markets and Foreign Direct Investment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3989, C.E.P.R. Discussion Papers.
  12. Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Working Papers Rutgers University, Newark, Department of Economics, Rutgers University, Newark 2005-005, Department of Economics, Rutgers University, Newark.
  13. Parisi, Maria Laura & Schiantarelli, Fabio & Sembenelli, Alessandro, 2006. "Productivity, innovation and R&D: Micro evidence for Italy," European Economic Review, Elsevier, Elsevier, vol. 50(8), pages 2037-2061, November.
  14. Almeida, Rita K. & Carneiro, Pedro, 2007. "Inequality and Employment in a Dual Economy: Enforcement of Labor Regulation in Brazil," IZA Discussion Papers 3094, Institute for the Study of Labor (IZA).
  15. Boeri, Tito & Helppie, Brooke & Macis, Mario, 2008. "Labor regulations in developing countries : a review of the evidence and directions for future research," Social Protection Discussion Papers 46306, The World Bank.
  16. Lucas Ronconi, 2010. "Enforcement and Compliance with Labor Regulations," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(4), pages 719-736, July.
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Cited by:
  1. Anagnostopoulos, Achilleas & Siebert, W. Stanley, 2012. "The Impact of Greek Labour Market Regulation on Temporary and Family Employment: Evidence from a New Survey," IZA Discussion Papers 6504, Institute for the Study of Labor (IZA).
  2. Gindling, T. H. & Mossaad, Nadwa & Trejos, Juan Diego, 2014. "The Consequences of Increased Enforcement of Legal Minimum Wages in a Developing Country: An Evaluation of the Impact of the Campaña Nacional de Salarios Mínimos in Costa Rica," IZA Discussion Papers 8253, Institute for the Study of Labor (IZA).

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