The Equilibrium Organization of Labor

43 Pages Posted: 24 Sep 2011 Last revised: 17 Dec 2013

See all articles by Birger Wernerfelt

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2011


We look for the equilibrium mix of trading institutions when manufacturers need sequences of labor services. The environment has two critical features: (a) Multilateral matching allows gains from specialization, but players incur specific set-up costs each time they are matched with a new trading partner. (b) Bilateral relationships economize on set-up costs, but are burdened by bargaining costs. Under weak conditions, four mechanisms weakly dominate all others: Markets, employment with negotiated wages, employment with market wages, and bilateral sequential contracting. In labor market equilibrium, markets are used for services that take longer time to perform, are in less demand, require fewer partner-specific investments, and have larger cost differences between sellers. The most efficient sellers work as specialist employees, those of medium efficiency sell their services as professionals in markets, and the least efficient become employees. Large firms hire specialists, medium-sized firms use employees or the market, and small firms use the market exclusively. .

Keywords: Labor, Organization, Trade

JEL Classification: D02, D23, L23

Suggested Citation

Wernerfelt, Birger, The Equilibrium Organization of Labor (October 25, 2011). Available at SSRN: or

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