Firm Entry and Employment Dynamics in the Great Recession

Abstract

The 2007-2009 recession is characterized by: a large drop in employment, an unprecedented decline in firm entry, and a slow recovery. Using confidential firm-level data, I show that financial constraints reduced employment growth in small relative to large firms by 4.8 to 10.5 percentage points. The effect of financial constraints is robust to controlling for aggregate demand and is particularly strong in small young firms. I show in a heterogeneous firms model with endogenous firm entry and financial constraints that a large financial shock results in a long-lasting recession caused by a \"missing generation\" of entrants.

Keywords: Employment, firm entry, financial crisis, small business, financial frictions, slow recovery, start-ups

JEL Classification: E24, E32, E44, G01, J20, L25