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Labor Responses, Regulation, and Business Churn
Author(s) -
ALOI MARTA,
DIXON HUW,
SAVAGAR ANTHONY
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12694
Subject(s) - economics , convergence (economics) , persistence (discontinuity) , capital (architecture) , dynamics (music) , steady state (chemistry) , econometrics , microeconomics , labour economics , macroeconomics , engineering , history , chemistry , physics , geotechnical engineering , archaeology , acoustics
Abstract We develop a model of sluggish firm entry to explain short‐run labor responses to technology shocks. We show that the labor response to technology and its persistence depend on the degree of returns to labor and the rate of firm entry. Existing empirical results support our theory based on short‐run labor responses across U.S. industries. We derive closed‐form transition paths that show the result occurs because labor adjusts instantaneously while firms are sluggish, and closed‐form eigenvalues show that stricter entry regulation results in slower convergence to steady state. Finally, we show that our theoretical results hold in a quantitative model with capital accumulation and interest rate dynamics.