Employment Protection, Firm Selection, and Growth

Markus Poschke

No 3164, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the effect of firing costs on aggregate productivity growth. For this purpose, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms, and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth – by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for welfare and growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU-U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here. A brief empirical analysis of the impact of firing costs on the size of exiting firms supports the model’s conclusions.

Keywords: firm selection; entry and exit; firm dynamics; labor market regulation; firing costs; endogenous growth theory (search for similar items in EconPapers)
JEL-codes: E24 J63 J65 L11 L16 O40 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2007-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published - published in: Journal of Monetary Economics, 2009, 56(8), 1074-1085

Downloads: (external link)
https://docs.iza.org/dp3164.pdf (application/pdf)

Related works:
Journal Article: Employment protection, firm selection, and growth (2009)
Working Paper: Employment protection, firm selection, and growth (2007)
Working Paper: Employment Protection, Firm Selection, and Growth (2006)
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: https://EconPapers.repec.org/RePEc:iza:izadps:dp3164

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().