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Firm Dynamics with Frictional Product and Labor Markets

Author

Listed:
  • Kaas, Leo

    (European University Institute)

  • 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 of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp11745
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    Cited by:

    1. Alex Clymo, 2019. "Dispersion Over the Business Cycle: Productivity versus Demand," 2019 Meeting Papers 1125, Society for Economic Dynamics.
    2. Colciago, Andrea & Fasani, Stefano & Rossi, Lorenza, 2025. "Firm entry, endogenous wage moderation, and labor market dynamics," European Economic Review, Elsevier, vol. 172(C).
    3. Canales, Mario & Lopez-Martin, Bernabe, 2024. "Exchange rates, uncertainty, and price-setting: Evidence from CPI microdata," Economic Modelling, Elsevier, vol. 139(C).
    4. Paule-Paludkiewicz, Hannah, 2020. "Does the Right to Work Part-Time Affect Mothers' Labor Market Outcomes?," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224556, Verein für Socialpolitik / German Economic Association.
    5. Gartner, Hermann & Stüber, Heiko, 2019. "Strukturwandel am Arbeitsmarkt seit den 70er Jahren: Arbeitsplatzverluste werden durch neue Arbeitsplätze immer wieder ausgeglichen (Structural change on the labor market since the 70s : The destructi," IAB-Kurzbericht 201913, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    6. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    7. Filippo Biondi & Sergio Inferrera & Matthias Mertens & Javier Miranda, 2023. "Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology," Jena Economics Research Papers 2023-011, Friedrich-Schiller-University Jena.
    8. Kovalenko, Tim, 2021. "Uncertainty shocks and employment fluctuations in Germany: The role of establishment size," Discussion Papers 119, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    9. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    10. Filippo Biondi & Sergio Inferrera & Matthias Mertens & Javier Miranda, 2025. "Declining Job Reallocation in Europe: The Role of Shocks, Market Power, and Technology," Jena Economics Research Papers 2025-004, Friedrich-Schiller-University Jena.
    11. Tim Kovalenko, 2021. "Uncertainty shocks and employment fluctuations in Germany: the role of establishment size," Working Papers 212, Bavarian Graduate Program in Economics (BGPE).

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    Keywords

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    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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