The Heterogeneous Consequences of Reduced Labor Costs on Firm Productivity

Francesco Del Prato and Paolo Zacchia

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We document how a reduction in labor costs led to heterogeneous effects on the total factor productivity (TFP) of manufacturing firms. Leveraging an Italian labor legislation reform and unique institutional features of the local collective bargaining system, we show that such effects vary along the TFP distribution. Relative to the counterfactual, TFP markedly declines on the left tail, which we explain via selection mechanisms; on the right, TFP mildly increases as firms are able to expand and reallocate their workforce. To guide the evaluation of welfare implications, we develop a general equilibrium model featuring firm selection and frictions in input markets.

Keywords: labor costs; productivity; collective bargaining; quantile effects (search for similar items in EconPapers)
JEL-codes: D22 D24 J08 O14 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-bec, nep-eff, nep-lab and nep-ure
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