Firm and Worker Dynamics in a Frictional Labor Market

Adrien Bilal, Niklas Engbom, Simon Mongey, Giovanni L. Violante

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This paper integrates the classic theory of firm boundaries, through span of control or taste for variety, into a model of the labor market with random matching and on-the-job search. Firms choose when to enter and exit, whether to create vacancies or destroy jobs in response to shocks, and Bertrand-compete to hire and retain workers. Tractability is obtained by proving that, under a parsimonious set of assumptions, all worker and firm decisions are characterized by their joint surplus, which in turn only depends on firm productivity and size. The job ladder in marginal surplus that emerges in equilibrium determines net poaching patterns by firm characteristics that are in line with the data. As frictions vanish, the model converges to a standard competitive model of firm dynamics. The combination of firm dynamics and search frictions allows the model to: (i) quantify the misallocation cost of frictions; (ii) replicate elusive life-cycle growth profiles of superstar firms; and (iii) make sense of the failure of the job ladder around the Great Recession as a result of the collapse of firm entry.

Original languageEnglish (US)
Pages (from-to)1425-1462
Number of pages38
JournalEconometrica
Volume90
Issue number4
DOIs
StatePublished - Jul 2022

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Diminishing returns to scale
  • firm dynamics
  • frictional misallocation
  • great recession
  • job turnover
  • marginal surplus
  • net poaching
  • on-the-job search
  • unemployment
  • vacancies
  • worker flows

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