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The Incredible Shrinking Portuguese Firm

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  • Serguey Braguinsky
  • Lee G. Branstetter
  • Andre Regateiro

Abstract

Using Portugal's extensive matched employer-employee data set, this paper documents an unusual feature of the Portuguese economy. For decades, the entire Portuguese firm size distribution has been shifting to the left. We argue in this paper that Portugal's shrinking firms are linked to the country's anemic growth and low productivity. We show that the shift in the Portuguese firm size distribution is not reflected in other advanced industrial economies for which we have been able to obtain comparable data. Careful attempts to account for expanding data coverage, a structural shift from manufacturing to services, and aggressive efforts to "demonopolize" the Portuguese economy leave about half of this shift unexplained by these factors. So, what does explain the shift? We argue that Portugal's uniquely strong protections for regular workers have played an important role. Drawing upon an emerging literature that that attributes much of the productivity gap between advanced nations and developing nations to the misallocation of resources across firms in developing countries, we develop a theoretical model that shows how Portugal's labor market institutions could prevent more productive firms from reaching their optimal size, thereby constraining GDP per capita. Calibration exercises based on this model quantify the degree of labor market distortion consistent with recent shifts in the Portuguese firm size distribution. These calibration exercises suggest quite substantial growth effects could arise if the distortions were lessened or abolished altogether.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17265.

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Date of creation: Jul 2011
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Handle: RePEc:nbr:nberwo:17265

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Cited by:
  1. David Card & Ana Rute Cardoso, 2011. "Can Compulsory Military Service Increase Civilian Wages? Evidence from the Peacetime Draft in Portugal," NBER Working Papers 17694, National Bureau of Economic Research, Inc.
  2. Reis, Ricardo, 2013. "The Portuguese Slump and Crash and the Euro Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9591, C.E.P.R. Discussion Papers.
  3. Garicano, Luis & Lelarge, Claire & Van Reenen, John, 2013. "Firm Size Distortions and the Productivity Distribution: Evidence from France," IZA Discussion Papers 7241, Institute for the Study of Labor (IZA).
  4. Peter Mihalyi, 2012. "The Causes of Slow Growth in Hungary during the Post-Communist Transformation Period," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1216, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  5. Andersson, Martin & Henrekson, Magnus, 2014. "Local Competiveness Fostered through Local Institutions for Entrepreneurship," Working Paper Series, Research Institute of Industrial Economics 1020, Research Institute of Industrial Economics.
  6. Card, David & Cardoso, Ana Rute, 2011. "Can Compulsory Military Service Raise Civilian Wages? Evidence from the Peacetime Draft in Portugal," IZA Discussion Papers 5915, Institute for the Study of Labor (IZA).
  7. Chiara Criscuolo & Peter N. Gal & Carlo Menon, 2014. "The Dynamics of Employment Growth: New Evidence from 18 Countries," OECD Science, Technology and Industry Policy Papers, OECD Publishing 14, OECD Publishing.
  8. Eleanor J. Choi & James R. Spletzer, 2012. "The Declining Average Size of Establishments: Evidence and Explanations," Working Papers, U.S. Bureau of Labor Statistics 452, U.S. Bureau of Labor Statistics.
  9. Navaretti , Giorgio Barba & Castellani , Davide & Pieri , Fabio, 2013. "Age and firm growth. Evidence from three European countries," CIRCLE Electronic Working Papers, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy 2013/41, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy.
  10. Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers, OECD Publishing 1046, OECD Publishing.
  11. Silvia Giacomelli & Carlo Menon, 2013. "Firm size and judicial efficiency: evidence from the neighbour's court," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 898, Bank of Italy, Economic Research and International Relations Area.

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