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Title: Unemployment, firm dynamics, and the business cycle Authors:  Stefano Fasani - Queen Mary University of London (United Kingdom) [presenting]
Andrea Colciago - DNB and University of Milan Bicocca (Netherlands)
Lorenza Rossi - University of Lancaster and University of Pavia (United Kingdom)
Abstract: A business cycle model that accounts for key business cycle properties of labor market variables and other aggregates is formulated and estimated. Three features distinguish our model (ESAM) from the standard model with SAM frictions in the labor market: frictional firm entry, endogenous product variety, and investment in two assets: stocks and physical capital. We estimate the structural parameters of the models by matching the IRFs obtained with a VAR. We identify shocks to technology, price markup, and wage bargaining power of workers by imposing sign restrictions in VAR responses. We deploy Bayesian minimum distance techniques to estimate structural parameters. ESAM accounts for the response of labor market variables such as wages, unemployment, job vacancies, and total hours, and for the response of profits and firm entry to the three shocks we identify. The success in replicating the dynamics of those variables is due to a form of endogenous wage moderation in response to technology shocks, that spreads from the extensive margin of investment. In SAM, that is the model with frictionless entry, the real wage typically displays a sharp response to shocks, that, in the case of technology shocks, leads to counterfactual responses of hours and profits. However, the improvement of ESAM over SAM is not confined to the replication of technology shocks. The statistical fit of ESAM, as measured by the marginal likelihood, is shown to be consistently higher than SAM.