Dual Employment Protection Legislation and the Size Distribution of Firms

Economics

Speaker:Roman Fossati, University of Bristol
Date: Wednesday 10 February 2016
Time: 13.30
Location: Xfi Henderson Lecture Theatre

Further details

We develop a theoretical model of firm dynamics with search frictions and asymmetric firing costs for temporary and permanent workers (dual employment protection legislation, DEPL). We characterize the equilibrium labor composition that firms with different productivity choose over their life cycle, and we study the effect of DEPL on the distribution of firms’ size and productivity. The results indicate that DEPL play similar role as a tax to big firms and a subsidy to small firms (size-dependent-policies) by distorting firm selection as well as the allocation of resources across firms, and thus generating a decline in the level of TFP. Consistent with the evidence documented in this paper, in spite of having similar labor productivity by firms’ size-classes, countries with stricter DEPL that incentives or extend the use of temporary contracts have relatively smaller firms (that concentrate a higher fraction of employment), and lower aggregate productivity. In this sense the model gives new insights into the sources of the considerable differences in the firm-size distributions across countries.