Seminar: Too Constrained to Grow? Analysis of Firms’ Response to the Alleviation of Skill Shortages

Skill shortages are a growing concern in a context of rapid technological change and potential solutions ranging from training policies to high-skill immigration incentives have been implemented by several Western countries in recent years. However, little evidence exists to date on what is the actual cost of such constraints in terms of foregone output, reduced productivity, and lower demand for complementary inputs. This paper takes advantage of a French reform making it easier for employers to hire immigrant workers in a set of tight occupations to evaluate how firms react to the sudden relaxation of skill constraints. The analysis uses a rich set of administrative data recording the occupational structure, the wages and the output of all firms operating in the private sector, and relies on a difference-in-differences approach. Results show that firms with an unmet demand for the set of competencies concerned by the reform react by increasing employment in these jobs by over 10%. This leads to a 1.5% growth in firm size, a 1.5% growth in revenues, a 2% growth in value added and a long run positive impact on productivity. On the other hand, capital stock remains unchanged. The effect is stronger in regions with tight labor markets, suggesting that the reform was effective in helping the most deprived areas. By performing a simple counterfactual exercise, we can compute that the policy decreased spatial inequality in productivity by about 2%. Finally, we use the reduced form specification as a first stage in a 2SLS procedure that recovers the elasticity of output and other inputs to the sudden increase in the employment of tight occupations, which gives some insights on the characteristics of the underlining production function.