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Dr. Petr Sedláček

University of Bonn, Germany

Abstract: Recent studies show that the well established negative relationship between a firm's size and its growth rate vanishes once its age is taken into account. Furthermore, it has been documented that young businesses have higher exit rates and grow faster than older ones, job creation and destruction rates fall with a firm's age and young firms create relatively more jobs. I extend these findings by showing that, compared to old firms, employment growth in young firms is more volatile and that business start-ups are important for unemployment rate developments. Next, I build a general equilibrium model with heterogeneous firms that is consistent with these cross-sectional facts and delivers realistic aggregate labor market dynamics. The model is then used to evaluate a government policy supporting young firms, a measure proposed under the recent "Startup America" initiative of the White House. The results suggest that such a policy should focus mainly on reducing barriers to entry. Supporting existing firms disrupts the selection process of successful firms, reducing average firm productivity, and resulting in lower levels of output.

Full Text: “Firm age, business cycles and aggregate labor market dynamics”