The Dynamic Effects of Local Labor Market Shocks on Small Firms in The United States

By Philip Barrett, Sophia Chen, Li Lin, Anke Weber

March 22, 2024

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Philip Barrett, Sophia Chen, Li Lin, and Anke Weber. The Dynamic Effects of Local Labor Market Shocks on Small Firms in The United States, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We use payroll data on over 1 million workers at 80,000 small firms to construct county-month measures of employment, hours, and wages that correct for dynamic changes in sample composition in response to business cycle fluctuations. We use this to estimate the response of small firms' employment, hours and wages following tighter local labor market conditions. We find that employment and hours per worker fall and wages rise. This is consistent with the predictions of the response to a demand shock in the well-known “jobs ladder” model of labor markets. To check this interpretation, we show our results hold when instrumenting for local demand using county-level Department of Defense contract spending. Correction for dynamic sample bias is important -- without it, the hours fall by only one third as much and wages increase by double.

Subject: Econometric analysis, Employment, Estimation techniques, Labor, Labor markets, Wage adjustments, Wages

Keywords: Business cycle, County-month measure, Demand shock, Department of Defense contract spending, Employment, Estimation techniques, Firm heterogeneity, Global, Hours, Labor market condition, Labor markets, Privatesector establishment-level data, Service establishment Equipment, Small firms, Wage adjustments, Wages

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/063
Stock No:

WPIEA2024063
ISBN:

9798400268649
ISSN:

1018-5941

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