Firm Dynamics with Frictional Product and Labor Markets

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 11745

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Production, Pricing, and Market Structure; Size Distribution of Firms
• Subject: firm dynamics ; prices ; demand ; employment ; uncertainty shocks

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kaas, Leo ; Kimasa, Bihemo
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/185205
• Last update: 10.03.2025, 11:45 AM CET