Product market imperfections and employment dynamics

How important is imperfect competition in the product market for employment dynamics? To investigate this, we formulate a model of employment adjustment with search frictions, vacancy costs, hiring costs, and imperfect competition in the product market. From this model, we derive a structural equation for employment that we estimate on firm-level data. We find that product market demand shocks have significant and quantitatively large effects on employment. This supports a model with imperfect competition in the product market. We find no evidence that the level of unemployment in the local labour market has a direct effect on job creation in existing firms. In some specifications, we find evidence of congestion effects, i.e., that hiring is slowed down if there are many vacancies in the local labour market.