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


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