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Labor Responses, Regulation and Business Churn in a Small Open Economy

Marta Aloi (), Huw Dixon () and Anthony Savagar

Studies in Economics from School of Economics, University of Kent

Abstract: We analyze labor responses to technology shocks when firm entry is sluggish due to endogenous sunk costs. We provide closed-form solutions for transition dynamics that show, when firm entry is slow to respond, labor will increase (decrease) relative to its long-run response if returns to labor input at the firm level are increasing (decreasing). Under stricter regulation (slower business churn), such short-run deviations of labor persist for longer. There is also potential for short-run productivity effects to differ from the long run.

Date: 2018-02
New Economics Papers: this item is included in nep-dge and nep-opm
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