Barriers to Entry and the Labor Market

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 Once these challenges are addressed, such measures are typically repealed or replaced with more permanent regulations.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.