Economics at your fingertips  

Size-dependent policies, talent misallocation, and the return to skill

Jose Lopez () and Jesica Torres ()

Review of Economic Dynamics, 2020, vol. 38, 59-93

Abstract: We study the allocation of talent in knowledge-based hierarchies subject to a payroll tax that increases with establishment size. The tax distorts the allocation of talent across occupations, as well as the sorting of all infra-marginal agents, thus attenuating the strength of the positive sorting throughout the entire economy. This talent misallocation results in lower output, smaller plants, higher self-employment, less wage employment, and lower returns to skill. To quantify these effects, we first estimate a tax policy to match the establishment-level evidence on the size-dependent compliance of social security contributions in Mexico, and conduct two sets of numerical exercises. Introducing this size-dependent policy into an undistorted economy calibrated to the U.S. generates a reduction in average plant size and output losses of 10 percent. The returns to skill for wage workers decrease by 75 percent. When we isolate the margins of misallocation in our model, we find that slightly over half of the output losses are due to talent mismatch, whereas the rest is accounted for by the best wage workers turning into self-employment. Similarly, eliminating the labor distortion in Mexico increases average plant size by 12 percent, and output by 9 percent, while the average return to skill for workers increases by 14 percent. Perfect enforcement of the average effective tax accounts for one fifth of the output gains from removing the tax. Size-dependent policies in our model generate a reduction in average plant size that is only a fifth of that obtained using a standard span-of-control model, yet output losses are three times as large. The main losers from this type of policies are high-skill wage workers. (Copyright: Elsevier)

Keywords: Organization of production; Misallocation; Size-dependent distortions; Returns to skill; Entrepreneurship; Size-distribution of plants (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See for details.

Related works:
Software Item: Code and data files for "Size-dependent policies, talent misallocation, and the return to skill" (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

Page updated 2021-03-28
Handle: RePEc:red:issued:18-231