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Threshold effects and firm size: the case of firing costs

  • Fabiano Schivardi
  • Roberto Torrini

We study the role of employment protection legislation (EPL) in determining firm size distribution. In many countries the provisions of EPL are more stringent for firms above certain size thresholds. We construct a simple model that shows that the smooth relation between size and growth probability is interrupted in proximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset of all Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in terms of discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of the threshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, we compute the long-run effects of EPL on size distribution. We find that average firm size would increase by less than 1% in steady state when removing the threshold; a quantitatively modest effect.

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File URL: http://eprints.lse.ac.uk/19956/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19956.

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Length: 53 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:ehl:lserod:19956
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  1. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  2. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  3. Kumar, Krishna B & Rajan, Raghuram G & Zingales, Luigi, 1999. "What Determines Firm Size?," CEPR Discussion Papers 2211, C.E.P.R. Discussion Papers.
  4. Daron Acemoglu & Joshua Angrist, 1998. "Consequences of Employment Protection? The Case of the Americans with Disabilities Act," Working papers 98-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Tito Boeri, 2004. "The Effects of Employment Protection: Learning from Variable Enforcement," 2004 Meeting Papers 445a, Society for Economic Dynamics.
  6. Pietro Garibaldi & Lia Pacelli & Andrea Borgarello, 2003. "Employment Protection Legislation and the Size of Firms," Working Papers 247, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Patrizio Pagano & Fabiano Schivardi, 2003. "Firm Size Distribution and Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(2), pages 255-274, 06.
  8. Davis, Steven J & Henrekson, Magnus, 1999. " Explaining National Differences in the Size and Industry Distribution of Employment," Small Business Economics, Springer, vol. 12(1), pages 59-83, February.
  9. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  10. Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2003. "Comparative Analysis of Firm Demographics and Survival: Micro-Level Evidence for the OECD Countries," OECD Economics Department Working Papers 348, OECD Publishing.
  11. Saint-Paul, Gilles, 2002. "Employment protection, international specialization, and innovation," European Economic Review, Elsevier, vol. 46(2), pages 375-395, February.
  12. Fabiano Schivardi, 2000. "Rigidita nel mercato del lavoro, disoccupazione e crescita," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 59(1), pages 117-143, April.
  13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  14. David H. Autor & John J. Donohue III & Stewart J. Schwab, 2003. "The Costs of Wrongful-Discharge Laws," NBER Working Papers 9425, National Bureau of Economic Research, Inc.
  15. David H. Autor & John J. Donohue & Stewart J. Schwab, 2004. "The Employment Consequences of Wrongful-Discharge Laws: Large, Small, or None at All?," American Economic Review, American Economic Association, vol. 94(2), pages 440-446, May.
  16. repec:fth:iniesr:482 is not listed on IDEAS
  17. Giuseppe BERTOLA & Tito BOERI & Sandrine CAZES, 2000. "Employment protection in industrialized countries: The case for new indicators," International Labour Review, International Labour Organization, vol. 139(1), pages 57-72, 03.
  18. Verick, Sher, 2004. "Threshold Effects of Dismissal Protection Legislation in Germany," IZA Discussion Papers 991, Institute for the Study of Labor (IZA).
  19. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  20. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January.
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