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.