IDEAS home Printed from https://ideas.repec.org/a/wly/iecrev/v62y2021i3p1281-1317.html
   My bibliography  Save this article

Firm Dynamics With Frictional Product And Labor Markets

Author

Listed:
  • Leo Kaas
  • Bihemo Kimasa

Abstract

We analyze the joint dynamics of prices, productivity, and employment across firms, building a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Using panel data on prices and output for German manufacturing firms, the model is calibrated to evaluate the quantitative contributions of productivity and demand for the labor market. Product market frictions decisively dampen the firms' employment adjustments to productivity shocks. We further analyze the impact of aggregate shocks to the first and second moments of productivity and demand and relate them to business‐cycle features in our data.

Suggested Citation

  • Leo Kaas & Bihemo Kimasa, 2021. "Firm Dynamics With Frictional Product And Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1281-1317, August.
    • Handle: RePEc:wly:iecrev:v:62:y:2021:i:3:p:1281-1317
    DOI: 10.1111/iere.12510
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/iere.12510
    Download Restriction: no
    File URL: https://libkey.io/10.1111/iere.12510?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    2. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    3. Mikael Carlsson & Oskar Nordstrom Skans, 2012. "Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost," American Economic Review, American Economic Association, vol. 102(4), pages 1571-1595, June.
    4. Krueger, Alan B. & Mueller, Andreas, 2010. "Job search and unemployment insurance: New evidence from time use data," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 298-307, April.
    5. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    6. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    7. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 507-569.
    8. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    9. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    10. Monika Merz & Eran Yashiv, 2007. "Labor and the Market Value of the Firm," American Economic Review, American Economic Association, vol. 97(4), pages 1419-1431, September.
    11. Lehmann, Etienne & Van Der Linden, Bruno, 2010. "Search Frictions On Product And Labor Markets: Money In The Matching Function," Macroeconomic Dynamics, Cambridge University Press, vol. 14(1), pages 56-92, February.
    12. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2019. "Price Dynamics With Customer Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 413-446, February.
    13. Andrea Pozzi & Fabiano Schivardi, 2016. "Demand or productivity: what determines firm growth?," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 608-630, August.
    14. Mueller, Andreas, 2010. "On-the-job search and wage dispersion: New evidence from time use data," Economics Letters, Elsevier, vol. 109(2), pages 124-127, November.
    15. Michael W. L. Elsby & Ryan Michaels, 2013. "Marginal Jobs, Heterogeneous Firms, and Unemployment Flows," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 1-48, January.
    16. Greg Kaplan & Guido Menzio, 2016. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 771-825.
    17. Anja Malchin & Ramona Voshage, 2009. "Official Firm Data for Germany," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 129(3), pages 501-513.
    18. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    19. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    20. Daniel Fackler & Claus Schnabel & Joachim Wagner, 2013. "Establishment exits in Germany: the role of size and age," Small Business Economics, Springer, vol. 41(3), pages 683-700, October.
    21. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    22. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h481l2tb5 is not listed on IDEAS
    23. Russell Cooper & John Haltiwanger & Jonathan L. Willis, 2007. "Implications of Search Frictions: Matching Aggregate and Establishment-level Observations," NBER Working Papers 13115, National Bureau of Economic Research, Inc.
    24. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    25. Greg Kaplan & Guido Menzio, 2015. "The Morphology Of Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1165-1206, November.
    26. Michael C. Burda & Jennifer Hunt, 2011. "What Explains the German Labor Market Miracle in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 273-335.
    27. James Albrecht & Fabien Postel‐Vinay & Susan Vroman, 2013. "An Equilibrium Search Model Of Synchronized Sales," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 473-493, May.
    28. Chang, Yongsung & Hornstein, Andreas & Sarte, Pierre-Daniel, 2009. "On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 328-343, April.
    29. Lucia Foster & John Haltiwanger & Chad Syverson, 2016. "The Slow Growth of New Plants: Learning about Demand?," Economica, London School of Economics and Political Science, vol. 83(329), pages 91-129, January.
    30. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    31. Giuseppe Moscarini & Fabien Postel-Vinay, 2012. "The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment," American Economic Review, American Economic Association, vol. 102(6), pages 2509-2539, October.
    32. Tom Krebs & Martin Scheffel, 2013. "Macroeconomic Evaluation of Labor Market Reform in Germany," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 664-701, December.
    33. Harald Stahl, 2010. "Price adjustment in German manufacturing: evidence from two merged surveys," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 67-92.
    34. Shigeru Fujita & Makoto Nakajima, 2016. "Worker Flows and Job Flows: A Quantitative Investigation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 1-20, October.
    35. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1291-1364.
    36. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 3-26, Summer.
    37. repec:hal:wpspec:info:hdl:2441/1787nsa6d1927a90u4bkkombn4 is not listed on IDEAS
    38. Michaela Fuchs & Antje Weyh, 2010. "The determinants of job creation and destruction: plant-level evidence for Eastern and Western Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(4), pages 425-444, November.
    39. Cooper, Russell & Haltiwanger, John & Willis, Jonathan L., 2007. "Search frictions: Matching aggregate and establishment observations," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 56-78, September.
    40. Leduc, Sylvain & Liu, Zheng, 2016. "Uncertainty shocks are aggregate demand shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 20-35.
    41. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    42. Mr. Tom Krebs & Mr. Martin Scheffel, 2013. "Macroeconomic Evaluation of Labor Market Reform in Germany," IMF Working Papers 2013/042, International Monetary Fund.
    43. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    44. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    45. repec:hal:spmain:info:hdl:2441/59cr4u3mmr9pobrceptvua5g8c is not listed on IDEAS
    46. Edouard Schaal, 2017. "Uncertainty and Unemployment," Econometrica, Econometric Society, vol. 85(6), pages 1675-1721, November.
    47. Leena Rudanko, 2018. "Firm Wages in a Frictional Labor Market," 2018 Meeting Papers 1154, Society for Economic Dynamics.
    48. David Argente & Munseob Lee & Sara Moreira, 2018. "How do Firms Grow? The Life Cycle of Products Matters," 2018 Meeting Papers 1174, Society for Economic Dynamics.
    49. repec:hal:spmain:info:hdl:2441/11qd47gdim8v799d6edke9i68q is not listed on IDEAS
    50. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    51. , & , B., 2014. "Search with multi-worker firms," Theoretical Economics, Econometric Society, vol. 9(3), September.
    52. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    53. Tom Krebs & Martin Scheffel, 2013. "Macroeconomic Evaluation of Labor Market Reform in Germany," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 664-701, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alex Clymo, 2019. "Dispersion Over the Business Cycle: Productivity versus Demand," 2019 Meeting Papers 1125, Society for Economic Dynamics.
    2. Paule-Paludkiewicz, Hannah, 2024. "Does the right to work part-time affect mothers' labor market outcomes?," Discussion Papers 12/2024, Deutsche Bundesbank.
    3. Gartner, Hermann & Stüber, Heiko, 2019. "Strukturwandel am Arbeitsmarkt seit den 70er Jahren: Arbeitsplatzverluste werden durch neue Arbeitsplätze immer wieder ausgeglichen (Structural change on the labor market since the 70s : The destructi," IAB-Kurzbericht 201913, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    4. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    5. Filippo Biondi & Sergio Inferrera & Matthias Mertens & Javier Miranda, 2023. "Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology," Jena Economics Research Papers 2023-011, Friedrich-Schiller-University Jena.
    6. Kovalenko, Tim, 2021. "Uncertainty shocks and employment fluctuations in Germany: The role of establishment size," Discussion Papers 119, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    7. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    8. Paule-Paludkiewicz, Hannah, 2020. "Does the Right to Work Part-Time Affect Mothers' Labor Market Outcomes?," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224556, Verein für Socialpolitik / German Economic Association.
    9. Tim Kovalenko, 2021. "Uncertainty shocks and employment fluctuations in Germany: the role of establishment size," Working Papers 212, Bavarian Graduate Program in Economics (BGPE).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    2. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    3. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    4. Ryan Michaels & David Ratner & Michael Elsby, 2016. "Vacancy Chains," 2016 Meeting Papers 753, Society for Economic Dynamics.
    5. Petr Sedláček & Vincent Sterk, 2017. "The Growth Potential of Startups over the Business Cycle," American Economic Review, American Economic Association, vol. 107(10), pages 3182-3210, October.
    6. Sedláček, Petr, 2020. "Lost generations of firms and aggregate labor market dynamics," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 16-31.
    7. Alessandro Gavazza & Simon Mongey & Giovanni L. Violante, 2018. "Aggregate Recruiting Intensity," American Economic Review, American Economic Association, vol. 108(8), pages 2088-2127, August.
    8. John Haltiwanger & Henry Hyatt & Erika McEntarfer, 2018. "Who Moves Up the Job Ladder?," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 301-336.
    9. Marcelo Veracierto, 2016. "Establishment Dynamics, Vacancies, And Unemployment: A Neoclassical Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1201-1236, November.
    10. Leena Rudanko, 2018. "Firm Wages in a Frictional Labor Market," 2018 Meeting Papers 1154, Society for Economic Dynamics.
    11. Alessandro Ruggieri, 2019. "Trade and labour market institutions: A tale of two liberalizations," Discussion Papers 2019-15, University of Nottingham, GEP.
    12. Ija Trapeznikova, 2017. "Employment Adjustment And Labor Utilization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 889-922, August.
    13. Carlos Carrillo-Tudela & Hermann Gartner & Leo Kaas, 2023. "Recruitment Policies, Job-Filling Rates, and Matching Efficiency," Journal of the European Economic Association, European Economic Association, vol. 21(6), pages 2413-2459.
    14. Tom Krebs & Martin Scheffel, 2016. "Labor Market Institutions and the Cost of Recessions," CESifo Working Paper Series 6262, CESifo.
    15. Sepahsalari, Alireza, 2016. "Financial market imperfections and labour market outcomes," LSE Research Online Documents on Economics 86224, London School of Economics and Political Science, LSE Library.
    16. Bernstein, Joshua & Richter, Alexander W. & Throckmorton, Nathaniel A., 2021. "Cyclical net entry and exit," European Economic Review, Elsevier, vol. 136(C).
    17. Alireza Sepahsalari, 2016. "Financial Market Imperfections and Labour Market Outcomes," Discussion Papers 1624, Centre for Macroeconomics (CFM).
    18. Krolikowski, Pawel M. & McCallum, Andrew H., 2021. "Goods-market frictions and international trade," Journal of International Economics, Elsevier, vol. 129(C).
    19. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.
    20. Shigeru Fujita & Makoto Nakajima, 2016. "Worker Flows and Job Flows: A Quantitative Investigation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 1-20, October.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:iecrev:v:62:y:2021:i:3:p:1281-1317. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.