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Firm Size Distortions and the Productivity Distribution: Evidence from France

  • Luis Garicano
  • Claire Lelarge
  • John Van Reenen

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 date 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% variable tax on labor. In our baseline case with French levels of partial real wage inflexibility welfare costs of the regulations are 3.4% of GDP (falling to 1.3% if real wages were perfectly flexible downwards). The main losers from the regulation are workers - and to a lesser extent, large firms - and the main winners are small firms.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1128.

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Date of creation: Feb 2012
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Handle: RePEc:cep:cepdps:dp1128
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