Employmentprotection,firmselection,andgrowth$

How dofiringcostsaffectaggregateproductivitygrowth?Toaddressthisquestion,a modelofendogenousgrowththroughselectionandimitationisdeveloped.Itis consistentwithrecentevidenceonfirmdynamicsandontheimportanceofreallocation forproductivitygrowth.Inthemodel,growthisdrivenbyselectionamong heterogeneousincumbentfirmsandissustainedasentrantsimitatethebest incumbents.Inthisframework,firingcostsnotonlyinducemisallocationoflabor, but alsoaffectgrowthbyaffectingfirms’exitdecisions.Importantly,chargingfiring costs onlytocontinuingfirmsraisesgrowthbypromotingselection.Alsochargingthem to exitingfirmsisakintoanexittax,hampersselection,andreducesgrowth—by 0.1 percentagepointsinacalibratedversionofthemodel.Withjobturnoververysimilarin thetwosettings,thisimpliesthatthetreatmentofexitingfirmsmattersforgrowth.In addition,theimpactongrowthratesislargerinsectorswherefirmsfacelarger idiosyncraticshocks,asinservices.ThisfitsevidencethatrecentEU–U.S.growthrate differencesarelargestinthesesectorsandimpliesthatfiringcostscanplayarolehere.