Lesson from France: Businesses Are Sensitive to Regulation

University of Chicago economist Casey Mulligan has gained prominence as an analyst of individuals' responses to incentives created by taxes and regulations. In his new book, The Redistribution Recession, he argues, controversially, that a significant portion of the current level of unemployment is a result of the government's redistributive policies intended to ameliorate the effects of the recession. Now Mulligan presents impressive graphical evidence that businesses are very sensitive to regulations, based on data from France:

The graph is taken from a study by economists from the London School of Economics and a French school in which they study French firms. France has a number of significant labor regulations that kick in when a firm reaches 50 employees in size. Mulligan notes two important characteristics of the plot of firms by size: the first is that there is a sharp discontinuity between the number of firms with 49 employees and the number of firms with 50 employees. The second is that there are more firms with 49 employees than there are with 45 employees, counter to what one would expect.

Mulligan takes these two facts as an indication that French firms are aware of the impact of regulations on their bottom lines, and act accordingly. That doesn't mean that the regulations that take effect at the 50-employee threshold aren't worthwhile, but it is a reminder that we should think hard about the effects, intended and unintended, of regulations. As Mulligan notes, both Obamacare and the Dodd-Frank Act will create cutoffs similar to the 50-employee one in France. The impact of those regulations is worth watching.