The labor market determinants of firm size – FIRMSIZE

In labor economics, significant attention has focused on labor market frictions affecting the matching of workers and firms. Labor market frictions, in essence, impose costs on workers and firms, such as prolonged unemployment duration for workers or missed business opportunities for firms. While it's widely recognized that these frictions can negatively impact average firm sizes and overall productivity in the economy, their quantitative effects have often been deemed relatively modest. In this project, I conjecture that labor market frictions amplify other frictions and can hence potentially prove vastly more important for the determination of economy-wide productivity than previously considered. This research project aims to assess the impact of labor market frictions on firm sizes and productivi-ty, focusing on two sub-projects that shed light on different facets of this hypothesis.
In Sub-Project A: Too Small to Grow? The Interplay of Financial and Labor Market Frictions, I analyse the interrelation of financial and labor market frictions by investigating how they jointly influence firm sizes and productivity. I hypothesize that capital and labor market frictions mutually reinforce each other. On the one hand, labor market frictions can exacerbate financial market frictions by precluding entrepreneurs to build up capital. On the other hand, capital market frictions can exacerbate labor market frictions by making separations into self-employment more likely. By integrating theoretical framework and empirical analysis, the project aims at empirically disentangling the effects of these frictions on firm productivity and size across different economic contexts. Leveraging cross-country data and microeconomic firm-level data from China, it explores how variations in financial and labor market conditions shape firm growth dynamics.

In Sub-project B, "The Role of Labor Market Frictions in Explaining the Urban Wage Premium", I will investigate how labor market frictions interact with agglomeration economies to impact the growth and productivity of firms. I will show theoretically that labor market frictions can reduce the potential for worker learning in settings with agglomeration economies. I hypothesize that labor market frictions determine both wage growth due to productivity growth as well as wage growth due to climbing the job ladder towards higher paying jobs. As larger cities feature larger and more productive firms on average, we expect that both productivity growth as well as wage growth due to ascending the job ladder also vary with city size. Building on the labor search literature, I will estimate the relative contribution of both forces. By combining theoretical modelling with empirical analysis using comprehensive administrative data from France and Austria, the project aims to uncover the mechanisms driving differences in wage growth across firms and locations.

Both sub-projects contribute to advancing theoretical understanding and empirical knowledge in the domains of labor economics. They offer novel insights into the complex interplay between labor market frictions, firm behavior, and economic outcomes. By bridging gaps in the existing literature and adopting a comparative perspective, the project aims to contribute to evidence-based policymaking.