Structural unemployment and the costs of firm entry and exit

• I contribute to the literature on unemployment in the OECD.
• I use a large-firm search model of the labor market with firm entry and exit.
• 2 regulations: entry cost and capital loss upon exit.
• Half of the unemployment gap between Continental Europe and the US is explained.
• Exit regulation is responsible for the explained gap, entry cost playing no role.

I build a large-firm model of the labor market with matching frictions and firm turnover. Firms hire both labor and capital. The model allows me to assess the impact of two regulatory frictions on unemployment: i) the administrative costs of establishing a new firm and ii) the share of capital entrepreneurs recover when exiting. These regulations explain half the unemployment gap between Continental Europe and the United States in the calibrated model. More precisely, exit regulation is responsible for the entire explained gap, with entry regulation playing no role. The degree of returns to scale and the presence of fixed capital in the model are important assumptions behind these results.