Firm size distribution in Italy and employment protection

TL;DR

This paper analyzes the distribution of firm sizes in Italy, revealing a deflection in the power law pattern linked to employment protection laws, and estimates potential job growth from policy adjustments.

Contribution

It identifies the impact of employment protection legislation on firm size distribution and quantifies potential employment increases from policy changes.

Findings

Power law fits firm size distribution up to 15 workers

Deflection linked to employment protection laws beyond 15 workers

Potential increase of 1.9% in new jobs with policy correction

Abstract

The number of Italian firms in function of the number of workers is well approximated by an inverse power law up to 15 workers but shows a clear downward deflection beyond this point, both when using old pre-1999 data and when using recent (2014) data. This phenomenon could be associated with employent protection legislation which applies to companies with more than 15 workers (the Statuto dei Lavoratori). The deflection disappears for agriculture firms, for which the protection legislation applies already above 5 workers. In this note it is estimated that a correction of this deflection could bring an increase from 3.9 to 5.8% in new jobs in firms with a workforce between 5 to 25 workers.