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New Business Start-ups and the Business Cycle

  • Coles, Melvyn G
  • Kelishomi, Ali Moghaddasi

This paper considers new business start-up activity within a stochastic equilibrium model of unemployment. The resulting job creation process is both natural and tractable, and generates equilibrium unemployment and vacancy dynamics which match the volatility and persistence observed in the data. The insight is that the standard Diamond/Mortensen/Pissarides matching framework works beautifully once the free entry of vacancies assumption is replaced by a model of business start-up activity. The approach is particularly important as it is demonstrated that a large part of net job creation in the U.S. economy can be attributed to new business start-ups.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8588.

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Date of creation: Oct 2011
Date of revision:
Handle: RePEc:cpr:ceprdp:8588
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  1. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
  2. Giuseppe Moscarini & Fabien Postel-Vinay, 2009. "Large Employers Are More Cyclically Sensitive," NBER Working Papers 14740, National Bureau of Economic Research, Inc.
  3. Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute for the Study of Labor (IZA).
  4. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
  5. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  6. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
  7. Claudio Michelacci & Olmo Silva, 2007. "Why So Many Local Entrepreneurs?," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 615-633, November.
  8. Rasmus Lentz & Dale T. Mortensen, 2005. "An Empirical Model of Growth Through Product Innovation," NBER Working Papers 11546, National Bureau of Economic Research, Inc.
  9. Marcus Hagedorn & Iourii Manovskii, 2011. "Productivity And The Labor Market: Comovement Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 603-619, 08.
  10. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
  11. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
  12. Fabien Postel-Vinay & Giuseppe Moscarini, 2013. "Stochastic Search Equilibrium," 2013 Meeting Papers 159, Society for Economic Dynamics.
  13. Shigeru Fugita & Garey Ramey, 2006. "Job matching and propagation," Working Papers 06-13, Federal Reserve Bank of Philadelphia.
  14. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  15. Yashiv, Eran, 2006. "U.S. Labor Market Dynamics Revisited," IZA Discussion Papers 2455, Institute for the Study of Labor (IZA).
  16. Michelacci, Claudio & Suarez, Javier, 2002. "Business Creation and the Stock Market," CEPR Discussion Papers 3513, C.E.P.R. Discussion Papers.
  17. repec:cdl:ucsdec:198797 is not listed on IDEAS
  18. Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," Working Papers tecipa-390, University of Toronto, Department of Economics.
  19. Bjoern Bruegemann & Giuseppe Moscarini, 2007. "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets," NBER Working Papers 13030, National Bureau of Economic Research, Inc.
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