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Firing costs, misallocation, and aggregate productivity

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  • Da-Rocha, José-María
  • Restuccia, Diego
  • Tavares, Marina Mendes

Abstract

We study the impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the evolution of establishment-level productivity is not invariant to the policy. Firing costs not only generate static factor misallocation, but also distort the selection of establishment’s growth by size, contributing to larger aggregate TFP losses. Numerical experiments indicate that firing costs equivalent to 5 year’s wages imply a reduction in TFP of more than 20%. Factor misallocation accounts for 20% of the productivity loss, whereas the remaining 80% arises from distorted selection in the productivity process.

Suggested Citation

  • Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina Mendes, 2019. "Firing costs, misallocation, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 60-81.
  • Handle: RePEc:eee:dyncon:v:98:y:2019:i:c:p:60-81
    DOI: 10.1016/j.jedc.2018.09.005
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0017-3 is not listed on IDEAS
    2. Jose Maria Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2014. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," Working Papers tecipa-523, University of Toronto, Department of Economics.
    3. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    4. Pedro Bento & Diego Restuccia, 2018. "On Average Establishment Size across Sectors and Countries," NBER Working Papers 24968, National Bureau of Economic Research, Inc.
    5. José-María Da-Rocha & Jaume Sempere, 2017. "ITQs, Firm Dynamics and Wealth Distribution: Does Full Tradability Increase Inequality?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(2), pages 249-273, October.
    6. Marcin Bielecki, 2017. "Innovation and endogenous growth over business cycle with frictional labor markets," Working Papers 2017-26, Faculty of Economic Sciences, University of Warsaw.

    More about this item

    Keywords

    Firing costs; Inaction; Misallocation; Establishments; Productivity;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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