Centre for Finance, Credit and Macroeconomics (CFCM)

CFCM 18/06: Labour responses, regulation and business churn in a small open economy


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

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Marta Aloi, Huw Dixon and Anthony Savagar

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Posted on Thursday 22nd March 2018

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