School of Economics

2018 Discussion papers


School of Economics Discussion Paper 18/04


Labor Responses, Regulation and Business
Churn in a Small Open Economy


Marta Aloi, University of Nottingham
Huw Dixon, Cardiff University
Anthony Savagar, University of Kent

February 2018


Abstract:

We analyze labor 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, labor will increase (decrease) relative to its long-run response if returns to labor input at the firm level are increasing (decreasing). Under stricter regulation (slower business churn), such short-run deviations of labor persist for longer. There is also potential for short-run productivity effects to differ from the long run.


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Last Updated: 27/03/2018