Firm heterogeneity and the macroeconomy

Abstract

The three chapters of this thesis contribute to a literature which emphasizes the importance of microeconomic heterogeneity for macroeconomic outcomes. In my work I focus on firm heterogeneity. I investigate the US labor market implications of a drop in the number of new firms, study the cyclical effects on productivity due to limits in the reallocation of capital across firms, and quantify the effectiveness of a policy which attempted to save jobs in Germany by altering firm incentives for lay-offs. The first chapter of this thesis investigates the role of new firms (‘start-ups’) in the US labor market. Start-ups and young firms grow faster and create more net jobs than older, incumbent firms. Yet since 2007 the number of start-ups in the US has declined by over 20%, accounting for a large part of the persistently high unemployment rate. I claim that this fact is related to the unprecedented fall in the value of real estate. Based on the empirical evidence I construct a model that captures the idea that start-ups require external financing, for which real estate is used as collateral. I calibrate and compute a quantitative competitive industry model with endogenous entry and exit, firm heterogeneity, labor adjustment costs, and aggregate shocks. It generates a ‘jobless recovery’ similar to what we observed in the US in the aftermath of the 2007-09 recession and is able to explain over 80% of the increase and persistence in unemployment since the recession. The second chapter, joint work with Russell Cooper, studies the productivity implications of frictions in the reallocation of factors. Recent empirical work has shown that misallocation of factors can have sizeable effects on the levels of aggregate output and productivity. We are interested in the question whether these frictions can also produce important cyclical movements. We find that the effects are quantitatively important in the presence of fluctuations in adjustment frictions and/or the cross sectional variation of profitability shocks. These fluctuations depend on higher order moments of the joint distribution of capital and plant-level productivity rather than mean values alone. Even without aggregate productivity shocks, the model has quantitative properties that resemble those of a standard stochastic growth model and match important facts about the cyclicality of reallocation and firm productivity dispersion. The last chapter, joint work with Russell Cooper and Moritz Meyer, studies the employment and productivity implications of short-time work (‘Kurzarbeit’) in Germany. During the years 2009-10 this policy was intended to provide incentives for firms to adjust labor input by reducing hours per worker instead of firing workers. Using confidential German firm micro data we estimate a model of costly labor adjustment. We use the estimated model to simulate the effects of the policy during the recent recession, trying to quantify in how far the German short-time work scheme reduced the allocative efficiency of the German labor market.