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Firm Dynamics with Frictional Product and Labor Markets

Leo Kaas and Bihemo Kimasa ()
Additional contact information
Bihemo Kimasa: University of Konstanz

No 11745, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the joint dynamics of prices, output and employment across firms. We develop a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Idiosyncratic productivity and demand shocks have distinct implications for the firms' output and price adjustments. Using panel data on prices and output for German manufacturing firms, we calibrate the model to evaluate the quantitative contributions of productivity and demand for the labor market and the dispersions of prices and labor productivity. We further analyze the impact of shocks to the first and second moments of idiosyncratic risk on macroeconomic outcomes. An increase in demand uncertainty induces sizable declines in output and employment together with rising cross-sectional dispersion of price and output growth which are typical features of recessions in our data.

Keywords: firm dynamics; prices; demand; employment; uncertainty shocks (search for similar items in EconPapers)
JEL-codes: D21 E24 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-tid
Date: 2018-08
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Working Paper: Firm dynamics with frictional product and labor markets (2016) Downloads
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