New Business Start-ups and the Business Cycle.

This paper considers new business start-up activity within a stochasticequilibrium model of unemployment. The resulting job creation process isboth natural and tractable, and generates equilibrium unemployment andvacancy dynamics which match the volatility and persistence observed inthe data. The insight is that the standard Diamond/Mortensen/Pissaridesmatching framework works beautifully once the free entry of vacancies as-sumption is replaced by a model of business start-up activity. The approachis particularly important as it is demonstrated that a large part of net jobcreation in the U.S. economy can be attributed to new business start-ups.