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Barriers to Entry and the Labor Market

Working paper 813
Working Papers

Published: 08 July 2024

We study the labor market effects of Temporary Barriers to Entry (TBEs). Esti- mates from a mixed-frequency Bayesian VAR show that TBEs: (i) reduce job creation by new entrants, but boost it for incumbent firms; (ii) persistently increase employ- ment concentration in large firms; (iii) temporarily reduce unemployment, but are recessionary in the long run; and (iv) mainly result from federal regulation. We build a macroeconomic model, featuring firm heterogeneity, endogenous entry and exit, and labor market frictions, which successfully reproduces the VAR evidence. The model shows that TBEs temporarily boost short-run economic activity by favoring existing firms, but are ultimately costly. Policy measures aimed at protecting incumbent firms, even if temporary, entail welfare costs.

Keywords: Job Creation; Reallocation; Unemployment; Heterogeneous firms; BVAR
JEL codes C13; E32

Working paper no. 813

813 - Barriers to Entry and the Labor Market

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Research Highlights

In this paper we study the labor market effects of Temporary Barriers to Entry (TBEs) for new firms. Estimates from a mixed-frequency Bayesian VAR applied to US data from 1982 to 2018 show that TBEs:

(i)             depress the job creation of new entrants, but boost that of incumbent firms:

(ii)           lead to a persistent rise in employment concentration at large firms;

(iii)         have short-run beneficial effects on unemployment, but are recessionary in the longer-run;

(iv)          are predominantly the result of Government regulation.

We build a macroeconomic model, featuring firm heterogeneity, endogenous entry and exit, and labor market frictions, which successfully reproduces the VAR evidence.

Regulatory measures are often introduced to protect incumbent firms from challenges of various nature. Once these challenges are addressed, such measures are typically repealed or replaced with more permanent regulations. The policy conclusion of our paper is that while temporary barriers to entry may promote economic activity in the short run by favoring the activity of incumbent firms, they remain costly. Policy measures aimed at protecting incumbent firms, even if temporary, entail welfare costs.

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