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Firm Size Distortions and the Productivity Distribution: Evidence from France

Author

Listed:
  • Luis Garicano
  • Claire Lelarge

    (RITM - Réseaux Innovation Territoires et Mondialisation - Université Paris-Saclay)

  • John van Reenen

Abstract

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 data 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 percent variable tax on labor. In our baseline case with French levels of partial real wage inflexibility, welfare costs of the regulations are 3.4 percent of GDP ( falling to 1.3 percent if real wages were perfectly flexible downward). The main losers from the regulation are workers—and to a lesser extent, large firms—and the main winners are small firms. (JEL L11, L51, J8)

Suggested Citation

  • Luis Garicano & Claire Lelarge & John van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," Post-Print hal-04196821, HAL.
    • Handle: RePEc:hal:journl:hal-04196821
    DOI: 10.1257/aer.20130232
    as

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    JEL classification:

    • J8 - Labor and Demographic Economics - - Labor Standards
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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