The Dynamic Effects of Local Labor Market Shocks on Small Firms in The United States

Philip Barrett, Sophia Chen, Li Lin and Anke Weber

No 2024/063, IMF Working Papers from International Monetary Fund

Abstract: We use payroll data on over 1 million workers at 80,000 small firms to construct county-month measures of employment, hours, and wages that correct for dynamic changes in sample composition in response to business cycle fluctuations. We use this to estimate the response of small firms' employment, hours and wages following tighter local labor market conditions. We find that employment and hours per worker fall and wages rise. This is consistent with the predictions of the response to a demand shock in the well-known “jobs ladder” model of labor markets. To check this interpretation, we show our results hold when instrumenting for local demand using county-level Department of Defense contract spending. Correction for dynamic sample bias is important -- without it, the hours fall by only one third as much and wages increase by double.

Keywords: small firms; wages; hours; firm heterogeneity; privatesector establishment-level data; business cycle; Department of Defense contract spending; labor market condition; county-month measure; service establishment Equipment; demand shock; Labor markets; Employment; Wage adjustments; Estimation techniques; Global (search for similar items in EconPapers)
Pages: 51
Date: 2024-03-22
New Economics Papers: this item is included in nep-lab and nep-ure
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