Firing Costs, Misallocation, and Aggregate Productivity

By José-María Da-Rocha, Marina Mendes Tavares and Diego Restuccia

http://d.repec.org/n?u=RePEc:nbr:nberwo:23008&r=dge

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.

Firing costs are a disaster. Sad!