Propagation of aggregate demand, firm specific and policy shocks in an economy with labour flows within and between firms of different sizes

This paper illustrates the propagation at the macro level of various types of shocks in a multifirm model representing a miniature economy which consists of firms of 4 different sizes. Our modelling exercise focuses on the interaction between internal and external labour flows. These flows are driven by the strategic behaviour of the firms with respect to fires, labour hoarding and internal versus external hires in case of opening of vacancies. The impulse response effects of our simulations show the mechanisms behind some findings of VAR-analyses, and of theoretical models of labour flows and the business cycle. Examples are the cleansing role of recessions and the larger spread of firm sizes due to technological change.