This paper proposes a new theory of business cycles based on the idea that financial uncertainty shocks change the nature of innovation. When investors become more risk tolerant, they fund riskier startups with greater growth potential. As these ambitious startups grow, the initial shock propagates and generates a boom in output and employment. I develop a heterogeneous firm industry model of the US business sector with countercyclical risk premia and innovation by startups and existing firms. The quantitative implementation of the model jointly matches time series properties of stock returns and macroeconomic aggregates, as well as micro evidence on firm cohort growth over the cycle.
This paper studies the connection between regional growth trends and labor market dynamics. New data on manufacturing worker flows for U.S. cities 1957-1981 show that growing cities see on average more new hires and more voluntary quits, but fewer forced layoffs. Moreover, recessions in growing cities are special in that hiring and quits are low, whereas their key feature in shrinking cities is a spike in layoffs. A model of migration and on-the-job search accounts for the common factor in growth, quits and layoffs in the cross section of cities. Its key feature is that jobs can become at risk: they have lower match surplus and are more likely to terminate. In growing cities, better prospects from on-the-job search lead workers to quit jobs at risk earlier, which reduces layoffs and misallocation.
Journal of Public Economics, 169, 160-171 (2019)
We study how the distribution of earnings growth evolves over the business cycle in Italy. We distinguish between two sources of annual earnings growth: changes in employment time (number of weeks of employment within a year) and changes in weekly earnings. Changes in employment time generate the tails of the earnings growth distribution, and account for the its procyclical skewness. In contrast, the distribution of weekly earnings growth is close to symmetric and stable over the cycle. This suggests that the employment margin should be carefully modeled to avoid erroneous conclusions on the nature of risks underlying the individual earnings. We show that the combination of simple employment and wage processes is enough to capture the complex features of the earnings growth distribution.