Firm Size and the Business Cycle

Yale University, New Haven CT

Investigators

Abstract

This award funds research on the business cycle dynamics of the relationship between employer size and job growth. The business cycle dynamics of firms of different sizes and productivities are important for fundamental issues in macroeconomics. For example, how real wages respond to aggregate shocks, whether hiring frictions or credit frictions have a larger impact on firm growth, and whether or not small businesses are indeed 'the engine of job creation' are all issues that depend on these dynamic effects of the business cycle. The PI and his team have already documented that employment in larger firms is more cyclical than employment in small firms (both in the U.S. and in other developed countries). They have developed a model that explains this observation that depends on turnover frictions. The funds awarded here will be used to expand this model to include a number of additional important determinants of firm size. The team will then test the model using restricted use business longitudinal microdata available through the Census Bureau. The empirical analysis will also provide additional robustness checks of the original empirical finding, will verify whether high paying firms (and not just larger firms) have more cyclical employment, and will also use business cycle indicators as a way to improve estimates of the entry of new firms. This project brings insights from labor economics to bear on important questions in macroeconomics. The broader impacts are substantial, especially because public policy on small business often starts with the assumption that these businesses are the engine of job creation. Finally, a number of graduate students will be trained in the methods necessary to work with sensitive microdata at a secure data facility.