Equilibrium Displacement Externalities
Expert TheoryReview
Evaluating labor market policy success purely at the individual firm level overstates net aggregate employment creation because targeted subsidies or recruitment assistance cause congestion and candidate displacement among untreated competitor firms.
Picture this
If a city builds an express lane for 5% of delivery trucks, those specific trucks get to their destinations faster, but the extra traffic they cause at highway intersections slightly slows down all the other 95% of trucks, making the total citywide gains smaller than the individual speed boost suggests.
What the evidence says
At baseline French market tightness ($\theta = 0.42$), displacement externalities reduce net aggregate job creation to 68%–73% of the measured firm-level treatment impact ($ED(\sigma)/\sigma AB \approx 0.68\text{--}0.73$), demonstrating that equilibrium spillover losses offset roughly 27%–32% of firm-level hiring gains.
- Who was studied
- Calibrated macro-search equilibrium model (extending Mortensen-Pissarides and Michaillat frameworks) simulated across 7,438 firms in French micro-markets.
- How
- Theoretical equilibrium simulation evaluating the ratio of aggregate market employment gains to direct micro-experimental treatment effects ($\sigma$ varying from 0 to 1).
What to do
Factor general equilibrium spillover discounts (subtracting 27% to 32% from micro-level hiring estimates) into cost-benefit evaluations before scaling firm-targeted labor interventions nationwide.
From the source
"For each hire in a treated firm the real increase in the total workforce in the market will be only 0.68. This suggests that even with a marginal intervention equilibrium effects can matter."
Are_Active_Labor_Market_Policies_Directed_at_Firms_Effective_Evidence.pdf