Recent empirical work indicates that job creation and destruction rates are large, implying significant amounts of job reallocation across firms. This paper builds a general equilibrium model of this reallocation process, calibrates it using data on firm-level dynamics, and evaluates the aggregate implications of policies that interfere with this process. We find that a tax on job destruction at the firm level has a sizable negative impact on total employment: a tax equal to 1 year's wages reduces employment by roughly 2.5 percent. More striking, however, are the welfare consequences: the cost in terms of consumption of this same tax is greater than 2 percent.

Recent empirical work indicates that job creation and destruction rates are large, implying significant amounts of job reallocation across firms. This paper builds a general equilibrium model of this reallocation process, calibrates it using data on firm-level dynamics, and evaluates the aggregate implications of policies that interfere with this process. We find that a tax on job destruction at the firm level has a sizable negative impact on total employment: a tax equal to 1 year's wages reduces employment by roughly 2.5 percent. More striking, however, are the welfare consequences: the cost in terms of consumption of this same tax is greater than 2 percent. The mechanism through which this welfare loss arises is apparently a decrease in average productivity, since this policy results in a decrease in average productivity of over 2 percent.