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Firm dynamics, job turnover, and wage distributions in an open economy

  • A. Kerem Coşar

    ()

    (The University of Chicago Booth School of Business)

  • Nezih Guner

    ()

    (ICREA-MOVE, Universitat Autònoma de Barcelona and Barcelona GSE)

  • James Tybout

    ()

    (Pennsylvania State University and NBER)

This paper explores the effects of tariffs, trade costs, and firing costs on firm dynamics and labor markets outcomes. The analysis is based on a general equilibrium model with labor market search frictions, wage bargaining, firing costs, firm-specific productivity shocks, and endogenous entry/exit decisions. Firing costs reduce firms' profits and discourage them from quickly adjusting their employment levels in response to idiosyncratic shocks. Tariffs and other trade costs reduce rents for efficient firms and increase rents for inefficient firms, as in Melitz (2003). These well-known effects interact with idiosyncratic productivity shocks and with scale economies in hiring costs to determine the equilibrium size distribution of firms, entry/exit rates, job turnover rates, rate of informality, and cross-firm wage distributions.

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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2011-06.

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Date of creation: 12 Apr 2011
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Handle: RePEc:imd:wpaper:wp2011-06
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