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Negative Shocks, Job Creation, and Selection

  • Daniel Kopasker
  • Holger Görg
  • Hassan Molana
  • Catia Montagna

High inter-country variability characterises the responsiveness of both output to (exogenous) shocks and employment to output contractions. We argue that intercountry differences in firm-size distributions contribute to explaining this variability. Within an open economy model, we show that competitive selection processes are an important channel through which a shock affects aggregate employment. Intra-industry selection is then shown to influence the effectiveness of active labour market policies in countering the employment and welfare effects of a negative shock. We estimate a measure of the shape parameter of firm size distribution and study its effect on the employment-output relationship for a number of OECD countries. Our results confirm the key predictions of the theory.

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Paper provided by WWWforEurope in its series WWWforEurope Working Papers series with number 11.

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Length: 35
Date of creation: Jul 2013
Date of revision:
Publication status: published
Handle: RePEc:feu:wfewop:y:2013:m:7:d:0:i:11
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Order Information: Postal: WWWforEurope Project Office Austrian Institute of Economic Research Arsenal Objekt 20 A-1030 Vienna
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Giovanni S. F. Bruno, 2005. "Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals," Stata Journal, StataCorp LP, vol. 5(4), pages 473-500, December.
  3. Eric J. Bartelsman & John C. Haltiwanger & Stefano Scarpetta, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," NBER Working Papers 15490, National Bureau of Economic Research, Inc.
  4. Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity," Munich Reprints in Economics 20471, University of Munich, Department of Economics.
  5. 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 2509-39, October.
  6. 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.
  7. Kluve, Jochen, 2010. "The effectiveness of European active labor market programs," Labour Economics, Elsevier, vol. 17(6), pages 904-918, December.
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