Front Matter Page
WP/18/179
IMF Working Paper
Size Dependent Policies, Informality and Misallocation
by Era Dabla-Norris, Laura Jaramillo Mayor, Frederico Lima, and Alexandre Sollaci
INTERNATIONAL MONETARY FUND
Front Matter Page
© 2018 International Monetary Fund
WP/18/179
IMF Working Paper
Fiscal Affairs Department
Size Dependent Policies, Informality and Misallocation
Prepared by Era Dabla-Norris, Laura Jaramillo Mayor, Frederico Lima, and Alexandre Sollaci*
Authorized for distribution by Era Dabla-Norris
August 2018
Contents
1 Introduction
2 Institutional setting
3 Data and stylized Facts
3.1 Firm size distribution
3.2 Salaried and non-salaried employment
3.3 Sales, profits and wages
4 Model
4.1 Firm’s problem
4.2 Introducing size-dependent policies
4.3 Characterizing the labor demands
4.4 Equilibrium
5 Extensions
5.1 Firm splitting
5.2 Partially rigid wages
6 Model estimation
6.1 Empirical implications of the model
6.2 Estimation
7 Counterfactuals
7.1 The cost of regulation
7.2 Removing non-salaried labor
7.3 Changing the value of the threshold
8 Conclusion
A Other tables and figures
B Computing salaried employees’ compensations
C Estimating the elasticity of labor
C.1 Estimate θ
C.2 Estimate ϕ
D Estimating the firm size distribution
D.1 Derivation
D.2 Estimation
D.3 Remaining parameters in the model
E Model with firm splitting
E.1 Derivation
E.2 Estimation
F Wage rigidity
F.1 Estimating ρ
F.2 Calculating counterfactuals under partially rigid wages
List of Figures
1 Firm size distribution
2 Employment composition
3 Firm performance
4 Graphical representations of the many thresholds in the model
5 Model predictions for labor demands and density of total employment
6 Firm size distribution
7 Effects of removing size-dependent regulations
8 Winners and losers from introducing regulations (% change in income)
9 Effects of removing non-salaried labor
10 Winners and losers from removing non-salaried labor (% change in income).
11 Adopting a different policy threshold (% change relative to existing threshold)
A.1 Wages around the policy threshold - ENE
A.2 Firm size distribution with splitting
List of Tables
1 Regressions of log-sales on log-inputs and controls
2 Regressions of log-sales on level of inputs and controls
3 Parameters from maximum likelihood estimation
4 Aggregate impact of the size-dependent regulations (in percent)
5 Aggregate impact of eliminating non-salaried labor (in percent)
A.1 Distribution of the firm’s labor cost share
A.2 Regressions of log-sales on level of inputs and controls
A.3 Parameters from GMM estimation