Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement

This paper examines how stringent de facto firing regulations affect firm size throughout the developing world. We exploit a large firm level dataset across 63 countries and within country variation in the enforcement of the labor codes in countries with very different de jure firing regulations. Our findings strongly suggest that firms facing a stricter enforcement of firing regulations are on average smaller. We interpret this finding as supportive of the fact that more stringent de facto firing regulations tend to reduce average employment. We also find robust evidence that this effect is stronger for more labor intensive manufacturing firms, especially those operating in low-technology sectors. Evidence also shows that this negative correlation does not hold in countries with a very weak rule of law.