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Firing Costs, Misallocation, and Aggregate Productivity

Jose-Maria Da-Rocha, Marina Mendes Tavares and Diego Restuccia ()
Authors registered in the RePEc Author Service: José María Da Rocha ()

Working Papers from University of Toronto, Department of Economics

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. We show that firing costs not only generate static misallocation, but also a worsening of the productivity distribution substantially contributing to large aggregate TFP losses. In a calibrated version of the model, firing costs equivalent to 5 years' wages imply a drop in TFP of more than 20 percent. Consistent with the existing literature on firing costs, static misallocation only generates a small drop in TFP, accounting for around 20 percent of the total loss, whereas the remaining 80 percent arises from the endogenous change in the productivity distribution.

Keywords: firing costs; inaction; misallocation; establishments; productivity. (search for similar items in EconPapers)
JEL-codes: O1 O4 E1 E6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eff and nep-mac
Date: 2016-05-19
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Working Paper: Firing Costs, Misallocation, and Aggregate Productivity (2016) Downloads
Working Paper: Firing Costs, Misallocation, and Aggregate Productivity (2016) Downloads
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