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Population growth, employment protection, and firm-level distortions

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  • Chen, Cheng
  • Hattori, Takahiro

Abstract

Declining population growth and firm-level input distortions are important real-world phenomena. In this paper, we develop a firm dynamics model to study how firing costs induce input distortions through the lens of growth of working-age population. We find that the negative impact of firing costs on aggregate productivity and output is amplified when the growth rate of working-age population declines. This is because slower growth of labor supply leads to fewer entering firms and more incumbents, which are more affected by firing costs. Using Japanese establishment-level data, we calibrate the model and conduct counterfactual analyses, showing that a decline in population growth has a quantitatively significant impact on firm entry and firm-level input distortions. Finally, we provide evidence using Japanese establishment-level census data to support the model’s key predictions.

Suggested Citation

  • Chen, Cheng & Hattori, Takahiro, 2026. "Population growth, employment protection, and firm-level distortions," Journal of Economic Dynamics and Control, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:dyncon:v:183:y:2026:i:c:s016518892500209x
    DOI: 10.1016/j.jedc.2025.105243
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    Keywords

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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy

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