Essays on Firm Dynamics and Labor Market Flows

Abstract

Firm dynamics - firm entry, growth, and exit - are central to the creation and destruction of jobs as well as the flow of workers between employment and unemployment. The economic gains such as wage and productivity growth brought about by the dynamics of firms and the labor market flows are realized behind vast heterogeneity and changing conditions in the product market as well as the input markets, in particular, the labor market. For instance, labor differs in skill and experience; jobs differ by the skill requirements; and firms differ by productivity and product demand. Required, therefore, is a reasonably efficient matching process not only between workers and firms but also between firms and customers.My dissertation aims at providing new empirical and theoretical insights on firm dynamics and labor market flows. It analyses German firm or establishment data with detailed information on product prices, quantities sold, and employment histories. It also develops and simulates models of firm dynamics with richer labor and product market features, taking into account recent advances made in the literature. The models facilitate explaining the documented empirical distributions and the interaction of firm dynamics and labor and product markets as comprehensively as possible.The dissertation consists of three independent research essays organized in three chapters. It is a cumulative thesis. Chapter 1 and Chapter 2 are a study on the employer-level drivers of labor market flows with a focus on occupational heterogeneity and misallocation. Chapter 2 seeks to explain the empirical results documented in Chapter 1 with a calibrated general equilibrium quantitative model. It studies the joint interaction of labor market flows, misallocation, and occupational labor heterogeneity. Chapter 3 is a study on firm dynamics and the labor market. It distinguishes the supply and demand drivers of the dynamics of firms, prices, output, and employment.Chapter 1 is titled "Occupational Labor Market Flows''. This chapter investigates the cross-sectional patterns of the rates of occupational job and worker flows. Disregarding the occupational margin of job flows, implies a job to worker flow ratio of 34.8%, which is smaller than the 46.1% with occupation-based gross job flows. Thus, the latter is an improved measure of job flows and captures better the importance of job flows for worker flows. The chapter finds that one in four reallocated occupational jobs results in no net job changes, consistent with simultaneous job creation and destruction at the level of the establishment. These findings may be explained by imperfect substitutability of occupational labor in production, differences in the costs of occupational job turnover, occupation-specific labor productivity heterogeneity, or (labor) misallocation. Furthermore, while labor market flow rates in specific occupations, and for all occupations as a whole, have not trended at all, their relative shares have trended linearly over time, consistent with job polarization. This observation allows to treat the aggregate occupational employment trends separately from the cross-sectional dynamics, isolating the importance of cross-sectional heterogeneity.Chapter 2 is titled "Labor Market Flows and Misallocation with Occupational Heterogeneity''. The starting point of this chapter is the fact that where firms operate with more than one occupation, then an occupation classifies a workplace into subunits with similar skill requirements. Then, these subunits expand and shrink at different rates. When occupational job reallocation is accounted for, then gross job reallocation over and above net job creation is considerably large. This firm-level residual job reallocation leads to more worker reallocation per job reallocation than was previously documented. The chapter discusses empirical evidence for the phenomenon, explains it as a result of labor quality heterogeneity, misallocation of factor inputs such as labor, and quantifies their roles in a search model of firm dynamics. Due to computational complexity, the chapter ends with preliminary quantitative results.Chapter 3 is titled "Firm Dynamics with Frictional Product and Labor Markets''. It is jointly written with Leo Kaas. The chapter analyses the joint dynamics of prices, productivity and employment across firms. It develops a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Using panel data on prices and output for German manufacturing firms, the model is calibrated to evaluate the quantitative contributions of productivity and demand for the labor market. Product market frictions decisively dampen the firms' employment adjustments in response to productivity shocks. Further, the chapter analyses the impact of shocks to the first and second moments of idiosyncratic risk on macroeconomic outcomes. An increase in demand uncertainty induces 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.