Working Paper: NBER ID: w18022
Authors: Melvyn G. Coles; Dale T. Mortensen
Abstract: This paper considers a dynamic, non-steady state environment in which wage dispersion exists and evolves in response to shocks. Workers do not observe firm productivity and firms do not commit to future wages, but there is on-the-job search for higher paying jobs. The model allows for firm turnover (new start-up firms are created, some existing firms die) and firm specific productivity shocks. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Consequently, workers always quit to firms paying a higher wage and so move efficiently from less to more productive firms. As a further implication of the cost structure assumed, endogenous firm size growth is consistent with Gibrat's law. The paper provides a complete characterization and establishes existence and uniqueness of the separating (non-steady state) equilibrium in the limiting case of equally productive firms. The existence of equilibrium with any finite number of firm types is also established. Finally, the model provides a coherent explanation of Danish manufacturing data on firm wage and labor productivity dispersion as well as the cross firm relationship between them.
Keywords: Labor Turnover; Firm Growth; Unemployment; Wage Dispersion; Productivity
JEL Codes: D21; D49; E24; J42; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher productivity firms (D22) | higher wages (J39) |
| higher wages (J39) | lower quit rates (J26) |
| higher productivity firms (D22) | lower quit rates (J26) |
| wage dispersion (J31) | firm entry and exit (L26) |
| firm productivity (D22) | firm growth (L26) |
| decrease in wages (J31) | increase in quit rates (J26) |