Competitive Search and Firm Growth

Erzo Luttmer

No 941, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper describes a model of search unemployment in an economy with multi-worker firms. It combines competitive labor market search with the model of firm growth of Luttmer [2011]. In a baseline version, Gibrat's law holds approximately and aggregate shocks that destroy blueprint capital --for example, because certain activities have become obsolete-- lead to an extremely slow adjustment to the steady state. This can serve as a benchmark explanation for protracted unemployment. Slow rates of convergence arise as well in an economy in which Gibrat's law is replaced with more realistic accounts of firm growth. Some suggestive evidence on the limited impact of recessions on fast-growing firms is provided.

Date: 2011
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