Working Paper: NBER ID: w23008
Authors: Josmara Darocha; Marina Mendes Tavares; Diego Restuccia
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. Firing costs not only generate static factor misallocation, but also a worsening of the productivity distribution contributing to large aggregate TFP losses. Firing costs equivalent to 5 year's wages imply a drop in TFP of more than 20 percent. Factor misallocation accounts for 20 percent of the productivity loss, a relatively small drop in TFP, whereas the remaining 80 percent arises from the endogenous change in the productivity distribution.
Keywords: Firing Costs; Aggregate Productivity; TFP; Misallocation
JEL Codes: E1; E6; O1; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firing costs (J32) | static factor misallocation (F16) |
| static factor misallocation (F16) | drop in aggregate TFP (O49) |
| firing costs (J32) | drop in aggregate TFP (O49) |
| dynamic misallocation (D51) | drop in aggregate TFP (O49) |
| firing costs (J32) | changes in productivity distribution (D39) |
| changes in productivity distribution (D39) | dynamic misallocation (D51) |