Working Paper

The Aggregate Implications of Size Dependent Distortions

Abstract: This paper examines the aggregate implications of size-dependent distortions. These regulations misallocate labor across firms and hence reduce aggregate productivity. It then considers a case-study of labor laws in France where firms that have 50 employees or more face substantially more regulation than firms that have less than 50. The size distribution of firms is visibly distorted by these regulations: there are many firms with exactly 49 employees. A quantitative model is developed with a payroll tax of 0.15% that only applies to firm above 50 employees. Removing the regulation improves labor allocation across firms, leading in steady state to an increase in output per worker slightly less than 0.3%.

Keywords: Firm size distribution; regulation; threshold effects; reallocation;

JEL Classification: E23; O1; O40;

https://doi.org/10.20955/wp.2016.024

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2016-10-05

Number: 2016-24

Pages: 16 pages