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Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies

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  • Brendan Epstein
  • Alan Finkelstein Shapiro

Abstract

Many countries have large employment shares in micro and small firms that have limited access to formal financing and therefore rely on input credit. Such countries are mainly emerging and developing economies, whose business cycle dynamics are increasingly important for the global economy in light of the dramatic rise in international linkages and spillovers that have occurred over the last several decades. Emerging and developing economies implemented a host of countercyclical labor market policies amid the global financial crisis, but data limitations on high-frequency labor and job flows prevent a detailed empirical assessment of the effectiveness of these policies. To address this problem, we develop a business cycle model with frictional labor markets that is novel in light of its consistency with the employment and firm structure of emerging and developing economies. We use the model to assess the aggregate impact of key countercyclical labor market policies. We find that hiring subsidies and job intermediation services for large firms are particularly effective in aiding recoveries. Policies targeting smaller firms yield limited aggregate benefits and may even be detrimental to the recovery process. The labor market structure shapes sectoral allocation and explains the economy's differential response to policy.

Suggested Citation

  • Brendan Epstein & Alan Finkelstein Shapiro, 2014. "Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies," International Finance Discussion Papers 1115, Board of Governors of the Federal Reserve System (U.S.), revised 21 Aug 2014.
  • Handle: RePEc:fip:fedgif:1115
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    References listed on IDEAS

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    Cited by:

    1. Epstein, Brendan & Finkelstein Shapiro, Alan, 2019. "Financial development, unemployment volatility, and sectoral dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 99(C), pages 82-102.
    2. Munkacsi, Zsuzsa, 2015. "Fiscal austerity, unemployment and family firms," Discussion Papers 06/2015, Deutsche Bundesbank.
    3. Colombo, Emilio & Menna, Lorenzo & Tirelli, Patrizio, 2019. "Informality and the labor market effects of financial crises," World Development, Elsevier, vol. 119(C), pages 1-22.
    4. Finkelstein Shapiro, Alan & Mandelman, Federico S., 2016. "Remittances, entrepreneurship, and employment dynamics over the business cycle," Journal of International Economics, Elsevier, vol. 103(C), pages 184-199.
    5. Finkelstein Shapiro, Alan & González Gómez, Andrés, 2017. "Credit market imperfections, labor markets, and leverage dynamics in emerging economies," Journal of International Money and Finance, Elsevier, vol. 78(C), pages 44-63.

    More about this item

    Keywords

    Business cycles; input credit; self employment; small firms; search frictions; fiscal policy;

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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