Equilibrium Labor Turnover, Firm Growth and Unemployment

34 Pages Posted: 28 Apr 2012

See all articles by Melvyn G. Coles

Melvyn G. Coles

University of Essex - Department of Economics; Autonomous University of Barcelona; IZA Institute of Labor Economics

Dale T. Mortensen

Northwestern University - Department of Economics; IZA Institute of Labor Economics

Date Written: April 2012

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.

Suggested Citation

Coles, Melvyn G. and Mortensen, Dale T., Equilibrium Labor Turnover, Firm Growth and Unemployment (April 2012). NBER Working Paper No. w18022, Available at SSRN: https://ssrn.com/abstract=2047273

Melvyn G. Coles (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 873333 (Phone)
+44 1206 872724 (Fax)

Autonomous University of Barcelona

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
SPAIN

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Dale T. Mortensen

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8230 (Phone)
847-491-7001 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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