Startups, Credit, and the Jobless Recovery

Immo Schott

No 340, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Abstract Job creation depends on a firm's age. Startups (firms of age zero) and young firms play a crucial role for job creation: they grow faster and create more net jobs than older incumbent firms. During the 2008-2009 recession the jobs created by those firms declined considerably, aversely affecting aggregate employment figures. While net job creation by existing firms is beginnig to recover, job creation by startups in 2010 was at its lowest point since 1983 and continues to be at historically low levels. This paper argues that the conditions on the credit market are linked to the 'jobless recovery' phenomenon. Especially young and small firms are still finding it difficult to obtain credit, limiting their growth prospects and job creation. The paper links regional conditions in the US housing market to state-level data on job creation by startups. I then estimate a search model augmented with heterogeneous firms, entry and exit, and financial frictions. This model is able to match key moments of the firm distribution and employment at the micro- and macrolevel. In the context of this model I analyze the effects of a 'credit crunch' and consider possible policies to boost job creation by startups.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-ent
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