The importance of hiring frictions in business cycles

Renato Faccini, Eran Yashiv

Research output: Contribution to journalArticlepeer-review

Abstract

Hiring is a costly activity reflecting firms' investment in their workers. Microdata show that hiring costs involve production disruption. Thus, cyclical fluctuations in the value of output, induced by price frictions, have consequences for the optimal allocation of hiring activities. We outline a mechanism based on cyclical markup fluctuations, placing emphasis on hiring frictions interacting with price frictions. This mechanism generates strong propagation and amplification of all key macroeconomic variables in response to technology shocks and mutes the traditional transmission of monetary policy shocks. A local projection analysis of aggregate U.S. data shows that the empirical results, including the cyclicality of markups, are consistent with the model's impulse response functions.

Original languageEnglish
Pages (from-to)1101-1143
Number of pages43
JournalQuantitative Economics
Volume13
Issue number3
DOIs
StatePublished - Jul 2022

Keywords

  • Business cycles
  • confluence of hiring and price frictions
  • hiring as investment
  • intertemporal allocation
  • markup cyclicality
  • propagation and amplification

Fingerprint

Dive into the research topics of 'The importance of hiring frictions in business cycles'. Together they form a unique fingerprint.

Cite this