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Firm Dynamics with Frictional Product and Labor Markets

Author

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  • Kaas, Leo

    () (Goethe University Frankfurt)

  • Kimasa, Bihemo

    () (University of Konstanz)

Abstract

This paper analyzes the joint dynamics of prices, output and employment across firms. We develop a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Idiosyncratic productivity and demand shocks have distinct implications for the firms' output and price adjustments. Using panel data on prices and output for German manufacturing firms, we calibrate the model to evaluate the quantitative contributions of productivity and demand for the labor market and the dispersions of prices and labor productivity. We further analyze the impact of shocks to the first and second moments of idiosyncratic risk on macroeconomic outcomes. An increase in demand uncertainty induces sizable declines in output and employment together with rising cross-sectional dispersion of price and output growth which are typical features of recessions in our data.

Suggested Citation

  • Kaas, Leo & Kimasa, Bihemo, 2018. "Firm Dynamics with Frictional Product and Labor Markets," IZA Discussion Papers 11745, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11745
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    References listed on IDEAS

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    1. Krueger, Alan B. & Mueller, Andreas, 2010. "Job search and unemployment insurance: New evidence from time use data," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 298-307, April.
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    3. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.
    4. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 507-569.
    5. Michaela Fuchs & Antje Weyh, 2010. "The determinants of job creation and destruction: plant-level evidence for Eastern and Western Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(4), pages 425-444, November.
    6. Lucia Foster & John Haltiwanger & Chad Syverson, 2016. "The Slow Growth of New Plants: Learning about Demand?," Economica, London School of Economics and Political Science, vol. 83(329), pages 91-129, January.
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    8. James Albrecht & Fabien Postel‐Vinay & Susan Vroman, 2013. "An Equilibrium Search Model Of Synchronized Sales," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 473-493, May.
    9. David Argente & Munseob Lee & Sara Moreira, 2018. "How do Firms Grow? The Life Cycle of Products Matters," 2018 Meeting Papers 1174, Society for Economic Dynamics.
    10. Leena Rudanko, 2018. "Firm Wages in a Frictional Labor Market," 2018 Meeting Papers 1154, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    firm dynamics; prices; demand; employment; uncertainty shocks;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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