Abstract:

This paper studies the consequences of the recent decline in business dynamism in the United States for the labor market. Firm entry rates declined precipitously in recent decades, leading to an increase in the share of older, larger businesses. Younger workers tend to sort into younger firms, suggesting that the compositional shift of economic activity towards older firms may have harmed the labor market prospects of younger workers. In order to assess this hypothesis, I develop a model of labor market sorting with both on-the-job search and two-sided life-cycle heterogeneity. I calibrate the model to match the life-cycle profiles of worker flows and earnings as well as the employment shares of young versus old firms in the mid-1990s. I then simulate the response of the economy to a decline in the firm entry rate that replicates the shift in the firm age distribution away from younger and towards older firms. I find that the decline in business dynamism accounts for about 43 percent of the decline in employer switching and about 23 percent of the decline in employment rates between 1994 and 2019. Aggregate worker welfare falls by about 0.6 percent along the transition path, with younger workers experiencing larger declines.

Abstract:

Employment outcomes of Black men worsened significantly relative to White men during the second half of the 20th century. We explore the role of broad sectoral shifts in labor demand over this period in explaining this trend. We first quantify changes in local employment and population in response to local labor demand shifts for both groups of workers. We then combine our estimates with a stylized model that incorporates frictional local labor markets and imperfect mobility across markets. Our framework enables us to aggregate local responses while accounting for geographic mobility and regional employment composition. We find that sectoral reallocation can explain around one-fifth of the total exacerbation in the employment-to-population ratio differential between Black and White men over 1970–2010. Out-migration from harder-hit markets, while large, does not mitigate the impact of negative labor demand shifts. We also find that most of the predicted change in the employment differential is due to differential response rather than differential exposure to shifts across two groups.