The Impact of Firm-Level Shocks on Labor Flows

Using very comprehensive Swedish micro data, we examine how labour flows respond to permanent idiosyncratic variations in firm-level production functions and demand curves. Physical productivity shocks have just a minor impact on firm-level employment decisions. In response to firm-level demand shocks, we observe rapid and significant employment adjustments through hiring and separations. The choice of adjustment margin is determined by the sign of the shock: If the shocks are positive, firms respond by increasing hiring, and if the shocks are negative, firms adjust by increasing separations