Final answer:
Large firms, with greater organizational slack, can more readily absorb the impact of bad employees than small businesses, which can be significantly affected due to their smaller size and limited buffers. Labor laws, like those in France, can influence hiring decisions and increase unemployment by imposing strict regulations on businesses as they grow. During recessions, firms may retain workers to avoid the future costs of rehiring and training.
Step-by-step explanation:
Large firms often have more organizational slack, which refers to the buffer large companies have that allows them to more easily absorb inefficiencies, such as bad employees, without immediate detrimental effects on their performance. Conversely, small businesses tend to have less slack and thus may feel the impact of underperforming employees more acutely, affecting their operations and overall business health. This concept is related to underveloped and transitioning labor markets, where laws and regulations can influence hiring practices and the ability of businesses to adapt to economic changes.
An example of regulation affecting business practices is seen in France where labor laws impose significant requirements on firms once they reach 50 employees. These regulations encourage companies to limit their size to avoid the increased costs and obligations, which can subsequently affect employment rates or the natural rate of unemployment. On the other hand, during economic downturns or recessions, firms, especially larger ones, may avoid laying off workers due to the costs associated with rehiring and training, preferring to wait until they are sure that the recession is over before making such decisions.