Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies

66 Pages Posted: 31 May 2017

See all articles by Brendan Epstein

Brendan Epstein

Board of Governors of the Federal Reserve System

Alan Finkelstein Shapiro

Tufts University

Date Written: 2014-08-21

Abstract

Many countries have large employment shares in micro and small firms that have limited access to formal financing and therefore rely on input credit. Such countries are mainly emerging and developing economies, whose business cycle dynamics are increasingly important for the global economy in light of the dramatic rise in international linkages and spillovers that have occurred over the last several decades. Emerging and developing economies implemented a host of countercyclical labor market policies amid the global financial crisis, but data limitations on high-frequency labor and job flows prevent a detailed empirical assessment of the effectiveness of these policies. To address this problem, we develop a business cycle model with frictional labor markets that is novel in light of its consistency with the employment and firm structure of emerging and developing economies. We use the model to assess the aggregate impact of key countercyclical labor market policies. We find that hiring subsidies and job intermediation services for large firms are particularly effective in aiding recoveries. Policies targeting smaller firms yield limited aggregate benefits and may even be detrimental to the recovery process. The labor market structure shapes sectoral allocation and explains the economy's differential response to policy.

Keywords: Business cycles, search frictions, fiscal policy, self employment, small firms, input credit

JEL Classification: E24, E32, J64

Suggested Citation

Epstein, Brendan and Finkelstein Shapiro, Alan, Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies (2014-08-21). FRB International Finance Discussion Paper No. 1115, Available at SSRN: https://ssrn.com/abstract=2976809

Brendan Epstein (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alan Finkelstein Shapiro

Tufts University ( email )

177 College Ave
Medford, MA 02155
United States

HOME PAGE: http://https://sites.google.com/view/alanfinkelsteinshapiro

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