Abstract
AbstractWe analyze the joint dynamics of prices, productivity, and employment across firms, building a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Using panel data on prices and output for German manufacturing firms, the model is calibrated to evaluate the quantitative contributions of productivity and demand for the labor market. Product market frictions decisively dampen the firms' employment adjustments to productivity shocks. We further analyze the impact of aggregate shocks to the first and second moments of productivity and demand and relate them to business‐cycle features in our data.
Highlights
Firm heterogeneity matters for the labor market and for business-cycle dynamics
We show that the negative correlation between price and output growth requires a substantial contribution of productivity shocks, while the dispersion of price growth necessitates a prominent role for demand shocks
We distinguish between firm-level productivity and demand shocks which affect the firms’ output and pricing policies in different ways. The parameters of these shock processes are calibrated in order to match salient features of price and output dynamics of a panel of German manufacturing firms
Summary
Firm heterogeneity matters for the labor market and for business-cycle dynamics. For instance, firms which differ in size, age or productivity create and destroy jobs at different rates and they respond to aggregate shocks in different ways, see e.g. Davis et al (2006), Haltiwanger et al (2013) and Moscarini and Postel-Vinay (2012). This motivates a large literature on the role of firms in macroeconomics, much of which builds on the seminal contributions of Hopenhayn (1992) and Hopenhayn and Rogerson (1993), sometimes augmented by richer labor market features.1 In such models of firm dynamics, firms are hit by idiosyncratic transitory shocks to their revenue productivity which induces them to create or destroy jobs as they grow or contract over time. While Abbott (1991) and Foster et al (2008) document dispersion of producer prices in specific industries, Carlsson and Skans (2012) and Carlsson et al (2017) use Swedish firm-level data for the manufacturing sector, finding that unit labor costs are transmitted less than one-to-one to output prices, and that much of the variation in output prices remains unexplained by productivity shocks They find that employment responds negligibly to productivity shocks, while permanent demand shocks are the main driving force of employment adjustment
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