Labor Responses, Regulation and Business Churn

Aloi, Marta; Dixon, Huw; Savagar, Anthony

Abstract

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. Finally we show that our theoretical results hold in a quantitative model with capital accumulation and interest rate dynamics.

Citation

Aloi, M., Dixon, H., & Savagar, A. (2021). Labor Responses, Regulation and Business Churn. Journal of Money, Credit and Banking, 53(1), 119-156. https://doi.org/10.1111/jmcb.12694

• Journal Article Type: Article
• Acceptance Date: Aug 27, 2019
• Online Publication Date: Jul 13, 2020
• Publication Date: Feb 21, 2021
• Deposit Date: Aug 30, 2019
• Publicly Available Date: Jul 14, 2022
• Journal: Journal of Money, Credit and Banking
• Print ISSN: 0022-2879
• Electronic ISSN: 1538-4616
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 53
• Issue: 1
• Pages: 119-156
• DOI: https://doi.org/10.1111/jmcb.12694
• Keywords: Deregulation; Dynamic entry; Endogenous entry costs; Short-run labor responses
• Public URL: https://nottingham-repository.worktribe.com/output/2521097
• Publisher URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/jmcb.12694
• Additional Information: This is the peer reviewed version of the following article: Aloi, M., Dixon, H., & Savagar, A. (2020). Labor Responses, Regulation and Business Churn. Journal of Money, Credit and Banking, https://doi.org/10.1111/jmcb.12694, which has been published in final form at https://onlinelibrary.wiley.com/doi/abs/10.1111/jmcb.12694. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
• Contract Date: Aug 30, 2019