a/c "indignados"

The incredible shrinking Portuguese firm (Serguey Braguinsky, Lee Branstetter, André Regateiro)

(...) There is a link between Portugal's unusually poor productivity performance and another distinctive feature of its economic landscape – a firm size distribution that has been shifting to the left for almost 30 years.

Our analysis using Portugal's matched employer-employee database demonstrates the surprising extent and persistence of this shift (Braguinsky et al 2011). It is not found in other advanced industrial economies, such as the US or Denmark. Theoretically this could be an artefact of expanding data coverage – a reflection of the shift from manufacturing to services, or a response to the efforts of Portuguese governments in the 1980s and 1990s to de-monopolise sectors. However, even generous allowances for all of these factors leaves most of the shift unexplained. To explain the residual, we need to resort to Portugal's uniquely restrictive labour-market practices and their implications for the allocation of labour across firms:

• Even after the partial labour-market reforms of the late 1980s, it remains very difficult for enterprises to fire workers for cause or to lay off workers even in difficult economic circumstances.
• It remains all but impossible for firms to reduce employees' nominal wages, even when the firms face very adverse circumstances.
• Legally mandated severance payments are high, even by European standards, and Portuguese courts have been consistently characterised by a pro-worker orientation.
• Portuguese firms are required to provide a range of services to employees. OECD rankings of member states on the basis of labour-market protections consistently placed Portugal at the very top through the mid-1990s. (...)

There are ample reasons to believe that government interventions in the labour market distort the allocation of labour across firms. (...)

As many of the labour-market regulations are waived for sufficiently small firms, the literature has often found a “bulge” at a certain firm size just where extra regulations kick in (see for example Garicano et al 2011). But there is no such bulge around one particular firm size in the firm size distribution in Portugal because there are many different size thresholds at which restrictions apply and no single one is referenced often enough to matter on its own. Instead, labour protection is observed throughout the economy and the whole firm size distribution is shifted to the left. Another dimension of labour-market distortion revolves around the increasing extent to which the Portuguese legal, tax, and administrative regime discriminates against larger enterprises. As Portuguese enterprises grow in size, they confront a steadily growing set of rules, regulations, and mandates that increasingly drive a wedge between the value of employees to the firm and the cost of employing workers while maintaining compliance with all relevant laws. (..)

By driving a wedge between the costs firms must pay for employees and their value to the firm, these protections lead firms to reduce their employment, lowering the demand for workers in the aggregate. Somewhat unexpectedly, labour protection also forces some workers out of the employed workforce and into creating their own firms. These newly created “marginal” firms are particularly unproductive as their managers and employees would be better off working for more skilled managers. In effect, these protections distort and degrade the distribution of employees across managers of different quality. Not only is the entire firm size distribution shifted to the left, but productivity in terms of national per capita output falls. (...) Our results strongly suggest that Portugal could achieve first-order productivity gains by moving to a less distorted labour market.