"How do macroeconomic shocks propagate over time? How are they amplified? How do they affect macroeconomic aggregates? And what role does the labor market and its frictions play in the business cycle? These questions are at the heart of theoretical and empirical business cycle research. Better answers to these questions are important to European policy makers, especially in times of economic distress and uncertain growth perspectives in Europe, to more effectively design macro- and, as this project argues, microeconomic policies.This project develops a micro-to-macro-and-back analysis of the production side of the economy and its role in macroeconomic activity. The academic research agenda in macroeconomics has been rapidly moving towards an approach that takes microeconomic modelling seriously, focusing on the effects of micro-economic heterogeneity and rigidities. This is driven by a number of factors: the increasing availability of data showing the importance of micro behaviour in explaining macro activity; the increase in computer power making realistic simulation analysis of these results possible, and finally by the development of algorithmic capacities, such as in Krusell and Smith (1998), to model endogenous evolutions of micro-heterogeneities in general equilibrium models.This project fits squarely into this new research agenda in that it makes use of new micro data sets and state-of-the-art computational techniques to shed some light on the aforementioned questions. This will be done in three subprojects, focusing on three research objectives: 1) to quantify the extent of employment adjustment frictions using a novel data set and a novel econometric (nonparametric) approach, 2) to investigate the joint cyclical dynamics of job and worker flows and 3) to understand the impact of macroeconomic shocks on heterogeneous production units."