CFCM 18/06: Labour responses, regulation and business churn in a small open economy

Abstract

We analyze labour responses to technology shocks when firm entry is sluggish due to endogenous sunk costs. We provide closed-form solutions for transition dynamics that show, when firm entry is slow to respond, labour will increase (decrease) relative to its long-run response if returns to labour input at the firm level are increasing (decreasing).  Under stricter regulation (slower business churn), such short-run deviations of labour persist for longer. There is also potential for short-run productivity effects to differ from the long run.

Download the PDF of this paper

Authors

Marta Aloi, Huw Dixon and Anthony Savagar

View all CFCM discussion papers | View all School of Economics featured discussion papers