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Firms’ Employment Dynamics and the State of the Labor Market

Published online by Cambridge University Press:  12 November 2021

Karolina Stadin
Karolina Stadin*
Affiliation:
UCLS, Uppsala University The Ratio Institute
*
Email: karolina.stadin@nek.uu.se.
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Abstract

According to search and matching theory, a greater availability of unemployed workers should make it easier for a firm to fill a vacancy, but more vacancies at other firms should make recruitment more difficult. Simulating a theoretical model of a firm facing perfect competition in the product market and no convex adjustment costs (standard assumptions in the search and matching literature), I find that shocks to vacancies and unemployment lead to economically significant employment responses. Simulating a more realistic model with imperfect competition in the product market and convex adjustment costs, I find small employment effects of shocks to vacancies and unemployment. In particular, shocks to the number of unemployed seem to be unimportant. Estimating an employment equation on a panel of Swedish firms, I find that neither the number of unemployed workers nor the number of vacancies in the local labor market is important for firms’ employment decisions.

Keywords

Employment DynamicsSearch and Matching FrictionsImperfect CompetitionConvex Labor Adjustment Costs
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 1 , January 2023 , pp. 27 - 55
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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