Firm and Worker Dynamics in a Frictional Labor Market

126 Pages Posted: 16 Dec 2019

See all articles by Adrien Bilal

Adrien Bilal

Princeton University

Niklas Engbom

Federal Reserve Bank of Minneapolis

Simon Mongey

University of Chicago

Giovanni Violante

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers’ and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm’s productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.

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Suggested Citation

Bilal, Adrien and Engbom, Niklas and Mongey, Simon and Violante, Giovanni, Firm and Worker Dynamics in a Frictional Labor Market (December 2019). NBER Working Paper No. w26547. Available at SSRN: https://ssrn.com/abstract=3504430

Adrien Bilal (Contact Author)

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
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Niklas Engbom

Federal Reserve Bank of Minneapolis ( email )

120 Hennepin ave
Minneapolis, MN 55401
United States

Simon Mongey

University of Chicago ( email )

Giovanni Violante

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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