Labor Responses, Regulation and Business Churn
59 Pages Posted: 21 Feb 2019
Date Written: 2018
We develop a model of sluggish firm entry to explain short-run labor responses to technology shocks. We show that the labor response to technology and its persistence depend on the degree of returns to labor and the rate of firm entry. Existing empirical results support our theory based on short-run labor responses across US industries. We derive closed-form transition paths that show the result occurs because labor adjusts instantaneously whilst firms are sluggish, and closed-form eigenvalues show that stricter entry regulation results in slower convergence to steady state.
Keywords: deregulation, dynamic entry, endogenous entry costs
JEL Classification: D250, E200, L110, O330
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