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Entry and Exit, Unemployment, and the Business Cycle
Establishment entry and exit is strongly correlated with output and unemployment. This paper examines how these linkages affect business cycle dynamics through the lens of a search and matching model augmented to include multi-worker establishments that endogenously enter and exit. Analytical results show cyclical entry and exit cause reallocation of inputs that amplifies and skews business cycle dynamics. When the model is calibrated to the data, it generates realistic asymmetry in output and unemployment, data-consistent counter-cyclical endogenous uncertainty and a 55% higher welfare cost ...
Entry and Exit, Unemployment, and Macroeconomic Tail Risk
This paper builds a nonlinear business cycle model with endogenous firm entry and exit and equilibrium unemployment. The entry and exit mechanism generates asymmetry and amplifies the transmission of productivity shocks, exposing the economy to significant tail risk. When calibrating the rates of entry and exit to match their shares of job creation and destruction, our quantitative model generates higher-order moments consistent with U.S. data. Firm exit particularly amplifies the severity and persistence of deep recessions such as the COVID-19 crisis. In the absence of entry and exit, the ...
What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk?
We study the evolution of individual labor earnings over the life cycle using a large panel data set of earnings histories drawn from U.S. administrative records. Using fully nonparametric methods, our analysis reaches two broad conclusions. First, earnings shocks display substantial deviations from lognormality?the standard assumption in the incomplete markets literature. In particular, earnings shocks display strong negative skewness and extremely high kurtosis?as high as 30 compared with 3 for a Gaussian distribution. The high kurtosis implies that in a given year, most individuals ...