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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 data 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 percent variable tax on labor. In our baseline case with French levels of partial real wage inflexibility, welfare costs of the regulations are 3.4 percent of GDP (falling to 1.3 percent if real wages were perfectly flexible downward). 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, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
  • Handle: RePEc:aea:aecrev:v:106:y:2016:i:11:p:3439-79
    Note: DOI: 10.1257/aer.20130232
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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