Population aging and the increase in the relative supply of college-educated workers have transformed the labor force in developed economies. How do these secular trends affect the characteristics of firms in the economy? To answer this question, I develop a general equilibrium model in which both workers and firms are heterogeneous. In the model, firms of different sizes rely on different types of workers due to capital-skill complementarity in production. I estimate the model using administrative linked employer-employee data from Germany. The model predicts that the changes in the labor force composition entail the reallocation of production towards firms with a larger capital stock, which tend to be older and less dynamic. The quantitative results indicate that the demographic trends can account for most of the recently documented shift in the size distribution of firms, the falling number of new firms, and the increasing market concentration. The patterns of business dynamism across German industries provide reduced-form empirical support for the model's predictions.

Aggregate economic growth has traditionally been thought of as a supply-side phenomenon. We present a framework in which aggregate productivity growth is to a large extend demand-driven. In our model, heterogeneous firms can invest into research and development (R&D) but also expand their demand by lowering prices and attracting more customers. A powerful feedback loop emerges: higher firm-level productivity allows lower prices which attract more customers and, in turn, raise the incentives to innovate. Our quantitative analysis suggests that more than half of U.S. aggregate growth is in fact demand-driven. Moreover, failing to account for this feedback loop dramatically changes our understanding of R&D policies.

The paper explores the scope for a federal unemployment insurance scheme in the euro area. It models a union of atomistic member states that have authority over a wide range of domestic labor-market policies. Member states are faced with idiosyncratic business-cycle shocks, but are prevented from international borrowing. Labor-market frictions and wage rigidities mean that business cycles are inefficient. Federal UI transfers are financed through a lump-sum tax on member states. For fixed local labor-market policies, optimal federal unemployment-based transfers provide insurance against regional shocks, and smooth the business cycle. If member states can adjust labor-market policies in response, however, optimal federal UI is much less generous, rendering federal UI ineffective. Indexation of payouts to past unemployment rates does not address the dynamic incentives to free-ride.