Working Paper: CEPR ID: DP14246
Authors: Adrien Bilal; Niklas Engbom; Simon Mongey; Giovanni L. Violante
Abstract: This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers’ and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm’s productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.
Keywords: Decreasing Returns to Scale; Firm Dynamics; Frictions; Job Turnover; Marginal Surplus; Net Poaching; On the Job Search; Unemployment; Vacancies; Worker Flows
JEL Codes: D22; E23; E24; E32; J23; J63; J64; J69
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher marginal surplus (D69) | increased hiring from employment (J23) |
| decline in firm entry (L26) | reduced job-to-job transitions (J63) |
| reduced job-to-job transitions (J63) | breakdown in labor reallocation (J69) |
| fewer firms at the top of the job ladder (J62) | less vacancy posting (J63) |
| less vacancy posting (J63) | breakdown in labor reallocation (J69) |