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Firm entry, endogenous wage moderation, and labor market dynamics

Author

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  • Colciago, Andrea
  • Fasani, Stefano
  • Rossi, Lorenza

Abstract

Profit-seeking is a key driver of new business creation, which, in turn, significantly influences unemployment dynamics. This paper uses US data to estimate the joint responses of firm entry, profits, unemployment, hours worked, and other aggregates to commonly studied supply shocks. Our analysis finds a positive correlation between firm entry, profits, and total hours worked, alongside a negative correlation with the unemployment rate. We develop and estimate a general equilibrium model that captures these dynamics.

Suggested Citation

  • Colciago, Andrea & Fasani, Stefano & Rossi, Lorenza, 2025. "Firm entry, endogenous wage moderation, and labor market dynamics," European Economic Review, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:eecrev:v:172:y:2025:i:c:s001429212400268x
    DOI: 10.1016/j.euroecorev.2024.104939
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    Keywords

    Entry; Unemployment; Bayesian analysis; Search and matching;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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