Creator: Arellano, Cristina, Bai, Yan, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 466 Abstract:
The U.S. Great Recession featured a large decline in output and labor, tighter financial conditions, and a large increase in firm growth dispersion. We build a model in which increased volatility at the firm level generates a downturn and worsened credit conditions. The key idea is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. An increase in volatility induces firms to reduce their inputs to reduce such risk. Out model can generate most of the decline in output and labor in the Great Recession and the observed increase in firms' interest rate spreads.
Keyword: Credit constraints, Credit crunch, Firm heterogeneity, Firm credit spreads, Labor wedge, Great Recession, and Uncertainty shocks Subject (JEL): E23 - Macroeconomics: Production, E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, D53 - General Equilibrium and Disequilibrium: Financial Markets, D52 - Incomplete Markets, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Gavazza, Alessandro, Mongey, Simon J., and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 553 Abstract:
We develop an equilibrium model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with microevidence, fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. These hiring decisions of firms aggregate into an index of economy-wide recruiting intensity. We study how aggregate shocks transmit to recruiting intensity, and whether this channel can account for the dynamics of aggregate matching efficiency during the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations in matching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort in response to movements in labor market slackness.
Keyword: Aggregate matching efficiency, Unemployment, Vacancies, Firm dynamics, Recruiting intensity, and Macroeconomic shocks Subject (JEL): E44 - Financial Markets and the Macroeconomy, J63 - Labor Turnover; Vacancies; Layoffs, D25 - Intertemporal Firm Choice: Investment, Capacity, and Financing, J64 - Unemployment: Models, Duration, Incidence, and Job Search, J23 - Labor Demand, E32 - Business Fluctuations; Cycles, G01 - Financial Crises, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity