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

  • Rita K. Almeida
  • Z. Bilgen Susanlı

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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File URL: http://hdl.handle.net/10.1111/10.1111/rode.2012.16.issue-4
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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 16 (2012)
Issue (Month): 4 (November)
Pages: 540-558

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Handle: RePEc:bla:rdevec:v:16:y:2012:i:4:p:540-558
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  1. Boeri, Tito & Jimeno, Juan F., 2005. "The effects of employment protection: Learning from variable enforcement," European Economic Review, Elsevier, vol. 49(8), pages 2057-2077, November.
  2. 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.
  3. 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.
  4. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, vol. 15(3), pages 482-511, June.
  5. Amiti, Mary & Javorcik, Beata, 2005. "Trade Costs and Location of Foreign Firms in China," CEPR Discussion Papers 4978, C.E.P.R. Discussion Papers.
  6. Aterido, Reyes & Hallward-Driemeier, Mary & Pagés, Carmen, 2007. "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms," IZA Discussion Papers 3138, Institute for the Study of Labor (IZA).
  7. 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).
  8. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  9. Smarzynska, Beata & Spartareanu, Mariana, 2004. "Do foreign investors care about labor market regulations?," Policy Research Working Paper Series 3275, The World Bank.
  10. Parisi, Maria Laura & Schiantarelli, Fabio & Sembenelli, Alessandro, 2006. "Productivity, innovation and R&D: Micro evidence for Italy," European Economic Review, Elsevier, vol. 50(8), pages 2037-2061, November.
  11. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, . "What Determines Firm Size?," CRSP working papers 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  12. 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.
  13. Abidoye, Babatunde & Orazem, Peter & Vodopivec, Milan, 2008. "Firing Cost and Firm Size: A Study of Sri Lanka's Severance Pay System," Staff General Research Papers 12922, Iowa State University, Department of Economics.
  14. Haaland, Jan I. & Wooton, Ian, 2003. "Domestic Labour Markets and Foreign Direct Investment," CEPR Discussion Papers 3989, C.E.P.R. Discussion Papers.
  15. Alejandro Micco & Carmen Pagés-Serra, 2004. "Employment Protection and Gross Job Flows: A Differences-in-Differences Approach," Research Department Publications 4365, Inter-American Development Bank, Research Department.
  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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