Notes: the Figure shows how the marginal value of public funds (MVPF) of different policies changes when considering firm-level responses and spillovers relative to the case where only policy-targeted workers are consdered. [Figure 1]
I study the role of firms in the consequences of public policies that target workers and firms by developing a framework to incorporate firms into welfare analysis. Building on the existing sufficient statistics frameworks, I introduce heterogeneity across firms and involuntary unemployment caused by firms' employment decisions. The model can nest a wide variety of labor market frictions and firm-idiosyncratic responses to reforms. The framework rationalizes the use of the growing number of firm-level causal estimates of the effects of a policy to study its welfare impact. I apply the model to various reforms studied in the literature. Including the spillovers stemming from firm-level adjustments changes the welfare conclusions in most cases, suggesting a pivotal role of firms for the pass-through of many public policies.