Firm Dynamics and Random Search over the Business Cycle

Abstract: I build a tractable random search model with firm dynamics, on-the-job search, and aggregate shocks. Multi-worker firms make recruitment decisions, choose whether to enter or exit the market, and design wage contracts. Tractability is obtained by showing that, under a set of assumptions on the recruitment technology, the decisions of workers and firms can be expressed in terms of the firms’ current productivity. I introduce a numerical solution method to accommodate aggregate shocks in this environment and show that the model can replicate salient features of both firm-level data on productivity and employment and aggregate time series describing the business cycle. I use this framework to quantify the drivers of worker reallocation over the recent business cycle in Britain.

Keywords: firm dynamics; search; business cycle;

JEL Classification: E3;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2023-08-01

Number: 1069

Note: Revised May 2024.