Economics & Finance / Economic Theory / Labor Economics

How Chile's Firing Costs Killed Productivity: The Hidden $0.5% GDP Loss

Amil Petrin; Jagadeesh Sivadasan

Did you know that firing a worker can cost an entire economy? This video breaks down a groundbreaking 2011 study by Amil Petrin and Jagadeesh Sivadasan, published in the NBER working paper series. Using plant-level data from Chile's manufacturing sector, they reveal a shocking truth: when firing costs (like severance pay) went up in 1984 and 1991, companies became stuck with low-productivity workers. The result? A massive 0.5% loss in total output—just from misallocating labor alone. The researchers invented a simple metric called the 'plant-input gap' to measure this waste, comparing it to freely adjustable inputs like electricity to isolate the effect. No jargon, just the raw numbers: how a policy meant to protect workers actually hurt the economy's growth. Watch to see why 'allocative inefficiency' is the silent killer of GDP, and what it means for your country's job market.