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The Heterogeneous Consequences of Reduced Labor Costs on Firm Productivity

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  • Francesco Del Prato
  • Paolo Zacchia

Abstract

We document how a reduction in labor costs led to heterogeneous effects on the total factor productivity (TFP) of manufacturing firms. Leveraging an Italian labor legislation reform and unique institutional features of the local collective bargaining system, we show that such effects vary along the TFP distribution. Relative to the counterfactual, TFP markedly declines on the left tail, which we explain via selection mechanisms; on the right, TFP mildly increases as firms are able to expand and reallocate their workforce. To guide the evaluation of welfare implications, we develop a general equilibrium model featuring firm selection and frictions in input markets.

Suggested Citation

  • Francesco Del Prato & Paolo Zacchia, 2024. "The Heterogeneous Consequences of Reduced Labor Costs on Firm Productivity," CERGE-EI Working Papers wp783, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp783
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    References listed on IDEAS

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    Keywords

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    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
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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