DP8588 New Business Start-ups and the Business Cycle
|Author(s):||Melvyn G Coles, Ali Moghaddasi Kelishomi|
|Publication Date:||October 2011|
|Keyword(s):||aggregate dynamics, equilibrium unemployment, startups|
|JEL(s):||E24, E32, J63, J64|
|Programme Areas:||Labour Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8588|
This paper considers new business start-up activity within a stochastic equilibrium model of unemployment. The resulting job creation process is both natural and tractable, and generates equilibrium unemployment and vacancy dynamics which match the volatility and persistence observed in the data. The insight is that the standard Diamond/Mortensen/Pissarides matching framework works beautifully once the free entry of vacancies assumption is replaced by a model of business start-up activity. The approach is particularly important as it is demonstrated that a large part of net job creation in the U.S. economy can be attributed to new business start-ups.