Size Dependent Policies, Informality and Misallocation

By Era Dabla-Norris, Laura Jaramillo, Frederico Lima, Alexandre Sollaci

August 2, 2018

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Era Dabla-Norris, Laura Jaramillo, Frederico Lima, and Alexandre Sollaci. Size Dependent Policies, Informality and Misallocation, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We examine the effect of size-dependent policies in developing economies by focusing on a set of regulations that are applicable to firms with 20 or more formal employees in Peru. Firms can adjust to the regulations by (a) reducing their size, (b) shifting employment composition, or (c) splitting into subunits that fall below the regulatory threshold. We show that these actions are consistent with observed discontinuities in the distributions of firm size and employment composition. We extend the framework proposed by Garicano et al. (2016) to model and estimate the Peruvian economy and perform counterfactual exercises. Size-dependent regulations are costly for the economy, especially in the presence of labor market rigidities, and lead to lower aggregate wages, profits, and output. We also find that access to informal labor does not mitigate the economic impact of the size-dependent regulations, as the increase in informal employment is largely offset by a decline in formal employment.

Subject: Employment, Labor, Labor costs, Labor demand, Wages

Keywords: Appendix E, Employment, Firm hire, Firm owner, Firm size distribution, Firm splitting, Informality, Labor cost share, Labor costs, Labor demand, Math display, Medium firm, Misallocation, Productivity, Profit sharing, Profits increase, Salaried employee, Size density, Size-dependent policies, Third party firm, Wage rigidity, Wages, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/179
Stock No:

WPIEA2018179
ISBN:

9781484372340
ISSN:

1018-5941

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