R&D, Market Power, and the Cyclicality of Employment

This paper provides a first look into the joint effects of research and development (R & D) and market power on the cyclicality of employment. It presents a theoretical model with R & D and monopolistically competitive firms which shows that firms smooth their R & D activities when they face large R & D adjustment costs. This smoothing behavior comes at the expense of higher labor volatility, and it is stronger for firms with high R & D intensity and low market power. Firm-level data support these predictions. Dynamic panel estimations reveal that employment at competitive firms engaging in a high level of R & D is more procyclical.