Entry and Exit, Unemployment, and the Business Cycle

Abstract

Establishment entry and exit is strongly correlated with output and unemployment. This paper examines how these linkages affect business cycle dynamics through the lens of a search and matching model augmented to include multi-worker establishments that endogenously enter and exit. Analytical results show cyclical entry and exit cause reallocation of inputs that amplifies and skews business cycle dynamics. When the model is calibrated to the data, it generates realistic asymmetry in output and unemployment, data-consistent counter-cyclical endogenous uncertainty and a 55% higher welfare cost than the model without entry and exit.

Keywords: Unemployment, Firm Dynamics, Nonlinear, Skewness, Tail Risk, Uncertainty

JEL Classification: E24, E32, E37, J63, L11