Faculty of Economics and Business Administration Publications Database

Firm Dynamics with Frictional Product and Labor Markets

Kimasa, Bihemo
Volume: 62
Number: 3
Pages: 1281 - 1317
Month: August
ISSN-Print: 0020-6598
Link External Source: Online Version
Year: 2021

We analyze the joint dynamics of prices, productivity, and employment across firms, building 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 to productivity shocks. We further analyze the impact of aggregate shocks to the first and second moments of productivity and demand and relate them to business‐cycle features in our data.