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Firing Costs, Misallocation, and Aggregate Productivity

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  • Jose-Maria Da-Rocha
  • Marina Mendes Tavares
  • Diego Restuccia

Abstract

We assess the quantitative impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the distribution of establishment-level productivity is not invariant to the policy. Firing costs not only generate static factor misallocation, but also a worsening of the productivity distribution contributing to large aggregate TFP losses. Firing costs equivalent to 5 year's wages imply a drop in TFP of more than 20 percent. Factor misallocation accounts for 20 percent of the productivity loss, a relatively small drop in TFP, whereas the remaining 80 percent arises from the endogenous change in the productivity distribution.

Suggested Citation

  • Jose-Maria Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2016. "Firing Costs, Misallocation, and Aggregate Productivity," Working Papers tecipa-572, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-572
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0017-3 is not listed on IDEAS
    2. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    3. Pedro Bento & Diego Restuccia, 2018. "On Average Establishment Size across Sectors and Countries," NBER Working Papers 24968, National Bureau of Economic Research, Inc.
    4. Marina Mendes Tavares & Diego Restuccia & Jose-Maria Da-Rocha, 2014. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," 2014 Meeting Papers 1196, Society for Economic Dynamics.
    5. José-María Da-Rocha & Jaume Sempere, 2017. "ITQs, Firm Dynamics and Wealth Distribution: Does Full Tradability Increase Inequality?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(2), pages 249-273, October.
    6. Marcin Bielecki, 2017. "Innovation and endogenous growth over business cycle with frictional labor markets," Working Papers 2017-26, Faculty of Economic Sciences, University of Warsaw.

    More about this item

    Keywords

    firing costs; inaction; misallocation; establishments; productivity.;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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