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Threshold effects and firm size: The case of firing costs

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  • Roberto Torrini
  • Fabiano Schivardi

Abstract

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 broken 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 growing of firms in the proximity of the threshold is reduced by around 2%. We then construct a stochastic transition matrix for firm size that, together with the estimates, allows for a quantitative evaluation of the effects of EPL in the long run. Our results show that EPL does influence firm size distribution, but that its effects are quantitatively modest: average firm size would increase by less than 1% when removing the threshold effect. Our results suggest that EPL is unlikely to be a major determinant of cross-country differences in firm size.

Suggested Citation

  • Roberto Torrini & Fabiano Schivardi, 2004. "Threshold effects and firm size: The case of firing costs," 2004 Meeting Papers 445, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:445
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    1. 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.
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    Cited by:

    1. Koller, Lena & Schnabel, Claus & Wagner, Joachim, 2005. "Arbeitsrechtliche Schwellenwerte und betriebliche Arbeitsplatzdynamik: Eine empirische Untersuchung am Beispiel des Schwerbehindertengesetzes," Discussion Papers 38, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    2. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    3. Koller, Lena & Schnabel, Claus & Wagner, Joachim, 2006. "Arbeitsrechtliche Schwellenwerte und betriebliche Arbeitsplatzdynamik : eine empirische Untersuchung am Beispiel des Schwerbehindertengesetzes (Labour-law thresholds and employment dynamics in firms :," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 39(2), pages 181-199.
    4. Caggese, Andrea, 2007. "Testing financing constraints on firm investment using variable capital," Journal of Financial Economics, Elsevier, vol. 86(3), pages 683-723, December.
    5. Koller, Lena, 2005. "Arbeitsrechtliche Schwellenwerte: Regelungen an der Schwelle zur Unüberschaubarkeit," Discussion Papers 40, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    6. Marco Leonardi & Giovanni Pica, 2007. "Employment Protection Legislation and Wages," CSEF Working Papers 175, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Julián Messina & Giovanna Vallanti, 2007. "Job Flow Dynamics and Firing Restrictions: Evidence from Europe," Economic Journal, Royal Economic Society, vol. 117(521), pages 279-301, June.
    8. Bernhard Boockmann & Daniel Gutknecht & Susanne Steffes, 2008. "Effects of Dismissal Protection Legislation on Individual Employment Stability in Germany," IAW Discussion Papers 45, Institut für Angewandte Wirtschaftsforschung (IAW).
    9. Boockmann, Bernhard & Gutknecht, Daniel & Steffes, Susanne, 2008. "Die Wirkung des Kündigungsschutzes auf die Stabilität "junger" Beschäftigungsverhältnisse (The effect of dismissal protection legislation on the stability of newly started employment relatio," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 347-364.
    10. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, vol. 15(3), pages 482-511, June.
    11. repec:iab:iabzaf:v:39:i:2:p:181-199 is not listed on IDEAS
    12. repec:iab:iabzaf:v:41:i:2/3:p:347-364 is not listed on IDEAS
    13. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    14. Nicoletta Corrocher & Lucia Cusmano & Camilla Lenzi, 2013. "Growth in Knowledge-Intensive Business Services: Evidence from Lombardy," Industry and Innovation, Taylor & Francis Journals, vol. 20(6), pages 563-584, August.
    15. von Below, David & Thoursie, Peter Skogman, 2010. "Last in, first out?: Estimating the effect of seniority rules in Sweden," Labour Economics, Elsevier, vol. 17(6), pages 987-997, December.
    16. Elisabetta Trevisan, 2008. "Enforcement of Employment Protection and the hiring behaviour of firms. Evidence from a large Italian region," Working Papers 2008_25, Department of Economics, University of Venice "Ca' Foscari".

    More about this item

    Keywords

    Firm size distribution; Employment protection; Firing costs.;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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