Firm Entry and Employment Dynamics in the Great Recession
57 Pages Posted: 9 Nov 2012 Last revised: 2 May 2016
Date Written: February 1, 2016
New business creation declined an unprecedented amount during the Great Recession. I argue that financial constraints led to a contraction in young, small firms, which contributed greatly to the slow recovery. Using confidential firm-level data of the universe of firms and a difference-in-differences methodology, I estimate that financial constraints reduced employment growth in small firms relative to large firms by 5 to 10 percentage points, even after controlling for aggregate demand. I then show in a heterogeneous firm model with endogenous entry that a large financial shock reduces firm entry, creating a “missing generation” of firms and a slow recovery.
Keywords: employment, firm entry, financial crisis, small business, financial friction, business cycles, slow recovery
JEL Classification: E24, E32, E44, G01, L25, J2
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