Firm Wages in a Frictional Labor Market
40 Pages Posted: 24 Jan 2019 Last revised: 21 Feb 2019
Date Written: 2019-01-22
This paper studies a labor market with directed search, where multi-worker firms follow a firm wage policy: They pay equally productive workers the same. The policy reduces wages, due to the influence of firmsâ€™ existing workers on their wage setting problem, increasing the profitability of hiring. It also introduces a time-inconsistency into the dynamic firm problem, because firms face a less elastic labor supply in the short run. To consider outcomes when firms reoptimize each period, I study Markov perfect equilibria, proposing a tractable solution approach based on standard Euler equations. In two applications, I first show that firm wages dampen wage variation over the business cycle, amplifying that in unemployment, with quantitatively significant effects. Second, I show that firm wage firms may find it profitable to fix wages for a period of time, and that an equilibrium with fixed wages can be good for worker welfare, despite added volatility in the labor market.
Keywords: Labor Market Search, Business Cycles, Wage Rigidity, Competitive Search, Limited Commitment
JEL Classification: E24, E32, J41, J64
Suggested Citation: Suggested Citation