Is deregulating firm entry good for the workers? Which workers?

Ana P Fernandes, Priscila Ferreira, L Alan Winters, 9 September 2013

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Much attention is paid in economic-policy circles to the ease of ‘doing business’ and one of the most widely cited aspects of this is the speed and complexity with which entrepreneurs can register new firms. Easier entry has been shown to foster competition and through that to spur innovation, productivity and, implicitly, overall economic growth. With most European countries mired in a combination of low growth and a fiscal squeeze, policies that might boost growth without spending more public money – indeed, perhaps spending less – will appear particularly attractive.

The other current widespread policy concern in Europe is inequality, and so it is natural to ask how the easing of entry barriers to boost growth will affect different parts of society. Our research brings these two sets of concerns together, by asking how entry deregulation affects different groups of workers. Focussing on differences in workers’ education and skill levels, we find that on average more educated (skilled) workers certainly gain while less educated (skilled) ones probably lose.

Deregulating entry

Prior to 2005, starting a business in Portugal took 11 procedures, 20 forms and 78 days, and cost around 13.5 % of GDP per capita. In May 2005, however, a new government introduced the ‘On the Spot Firm’ (‘Empresa na Hora’) programme by which entrepreneurs could register a company at a one-stop shop within an hour, receiving the company identification card, the corporate taxpayer number and the social-security number in the same day and at a cost of 3% of GDP per capita. Even better, the programme was largely unanticipated and was rolled out across districts more or less randomly over a four year period, making it a good quasi-natural experiment for research (see Figure 1 for a geographical spread of the one-stop shops between 2005 and 2009), and extensive data are available on firms and their workers before and during the roll out. The ‘Quadros de Pessoal’ is a comprehensive and mandatory annual survey by the Portuguese Ministry of Labour and Social Security of all private sector firms employing one or more workers. Each of our eight years (2002-09) contains detailed data for over 250,000 firms and two million employees, and, with their unique registration numbers, we can trace them all over time.

Figure 1. 'On the Spot Firm': Introduction of one-stop shops by year and municipality

There are plenty of reasons why changes to firm regulation might have heterogeneous effects. Branstetter et al. (2013), for example, show that ‘On the Spot Firm’ resulted in increased firm formation and employment, but mostly among marginal firms – small, owned by the poorly educated and operating in low-tech sectors (these were the ones most readily deterred by existing heavy entry regulations). This might look as if it would boost the wages of the less skilled, but that is far from inevitable. For example, the increase in employment may have reflected an excess supply of less skilled labour so that increases in employment did not drive wages up, the firms they created may have increased the demand for skilled services (accountancy, design, etc.), and existing larger firms, feeling or fearing increased competition at the low end of the market, may have decided to upgrade their technology, which typically requires more skills and higher rewards for managerial and other scarce inputs. All these responses would see the wages and salaries of the skilled outstripping those of the less skilled. This is what we consider here and in our recent paper (Fernandes, Ferreira and Winters 2013).

The effect on competition and wages

We focus on private firms in the manufacturing and services sectors covering over the period 2002-09, which gives us a sample of 431,000 firms and 3.9 million workers. Having established that the skill premium (the difference between skilled and unskilled wages) appears to be greater where competition is greater, we look directly at the effects of the ‘On the Spot Firm’ programme. Working with the 308 municipalities in Portugal, we treat each as joining the programme from the year in which it gets its first ‘one-stop shop’ for conducting registrations. We find that the ‘On the Spot Firm’ programme significantly increased the number of firm registrations even after allowing for differences between municipalities, sectors and years. This is in line with the results of Bransetter et al (2013) on Portugal and Bruhn (2011) on Mexico, so we are confident that there was a direct effect on firm registration.

We then consider how the wages of workers with different skill levels are affected by this entry, making use of the different timing of the introduction of ‘one-stop shops’ across municipalities to identify the effect. That is, we ask whether the returns to skill or to education vary between included and excluded municipalities and over the periods before and after the deregulation reform was introduced. Our rich data allow us to identify the characteristics of the worker and the firm employing her, the industry and the municipality and so we are able to allow for most of the other factors that may affect wages. This increases our confidence that the programme effects we identify are genuine.

Our regression results (see the paper for details) show the effects of inclusion in the ‘On the Spot Firm’ programme on workers with different levels of education. 

Conclusions

The results are highly significant statistically, strongly consistent and rather striking:

  • Wages in general appear to be 1% lower in municipalities with an ‘On the Spot Firm’ one-stop shop.

This might be because the increased entry of marginal firms increases competition for the outputs that less-educated workers can provide (since we do not have data on firms with no employees – i.e. with only owners – we will miss any returns that such owners receive).

  • On top of this negative effect, secondary educated workers receive slightly over 1% extra, restoring them to parity between included and excluded districts.
  • Upper-secondary and Higher-educated workers receive stronger stimuli – over 2% and nearly 5% respectively.

The results for skill levels – as defined by workers’ occupations – are similar to those for education, except that low and medium skilled workers appear to gain little (and possibly to lose) while the premium to more skilled occupations is about 3% higher in ‘On the Spot Firm’ municipalities.

Recalling all the effects we have allowed for in making these comparisons, the 3% and 5% premium for skills and higher education are economically important.

  • Deregulating firm entry appears to boost competition and employment (and possibly aggregate income, although this has not been investigated) but its gains seem largely to be reaped by the better-off.

This may be quite acceptable to policymakers – and after all it increases the incentives for people to obtain education, which presumably helps Portugal’s competitiveness relative to other countries. However, in these days of sensitivity to inequality, it is not something which governments should be ignorant of.

References

Branstetter, L, F Lima, L Taylor and A Venancio (2010), "Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence From Recent Reforms in Portugal", NBER Working Paper 16473, forthcoming in Economic Journal.

Bruhn, M (2011), "Licence to Sell: The Effects of Business Registration Reform on Entrepreneurial Activity in Mexico", Review of Economics and Statistics 93(1), 382-386.

Fernandes, Ana P, Priscila Ferreira and L Alan Winters (2013), “Firm Entry Deregulation, Competition and Returns to Education and Skill”, CEPR Discussion Paper 9550, July.

Topics: Industrial organisation, Labour markets
Tags: barriers to entry, deregulation, firm entry

Lecturer in Economics, University of Exeter

Assistant Professor in Economics and Direcrot of the Applied Microeconomics Research Unit (NIMA), University of Minho

Professor of Economics at the University of Sussex, Chief Economist at the UK Department for International Development, and CEPR Research Fellow

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