Firm Entry and Labor Market Dynamics

Federal Reserve Bank of Atlanta Working Paper 2008-17

38 Pages Posted: 16 Aug 2008

See all articles by Enchuan Shao

Enchuan Shao

University of Saskatchewan - Economics

Pedro Silos

Federal Reserve Bank of Atlanta

Date Written: August 2008

Abstract

We present a model of aggregate fluctuations in which monopolistic firms face sunk costs to enter the production process and labor markets are characterized by search and matching frictions. Entrants post vacancies and are matched to idle workers. Our specification of sunk costs gives rise to a countercyclical net present value of a vacancy; it is always zero in models where entry is free. The model displays a strong degree of amplification and propagation. The time-varying value of a vacancy has implications for the surplus division between firms and workers over business cycle. In the data, we proxy this division using the ratio of corporate profits to output and workers' compensation to output. We document the cyclical behavior of profit's and labor's shares: Profit's share leads the cycle and is procyclical and more volatile than output. Labor's share inversely leads the cycle and is weakly countercyclical and smoother than output. Our model is consistent with the cross-correlations of both shares and the higher volatility of the share of profits. Regarding propagation and amplification, the model matches the persistence of vacancy creation and two-thirds of the observed volatility of market tightness relative to output.

Keywords: search, matching, business cycles, income shares

JEL Classification: E24, E32, J32

Suggested Citation

Shao, Enchuan and Silos, Pedro, Firm Entry and Labor Market Dynamics (August 2008). Federal Reserve Bank of Atlanta Working Paper 2008-17, Available at SSRN: https://ssrn.com/abstract=1225974 or http://dx.doi.org/10.2139/ssrn.1225974

Enchuan Shao

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

Pedro Silos (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8630 (Phone)
404-498-8956 (Fax)

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