No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
Bargaining with Commitment between Workers and Large Firms
Abstract
I study bargaining between workers and large firms when commitment to long-term contracts is feasible. The marginal surplus associated with a match is split in a pre-determined ratio, analogously to generalized Nash bargaining. Commitment avoids the over-hiring inefficiency identified by Stole and Zwiebel (1996a,b) and Smith (1999). However, even under the Hosios (1990) condition, the equilibrium is still not constrained efficient since large firms search too intensively relative to small firms. If workers can direct their search to firms by size, or if firms can hire workers instantaneously at constant marginal cost, the equilibrium is constrained efficient if the Hosios condition applies. The pattern of growth rates of firms by size can be used to identify how firms bargain with workers. JEL Codes: E24, J31, J64.
... Our paper is also related to the following three papers. Hawkins (2015) studies the efficiency of search equilibrium with full commitment. Achieving efficiency requires to maximize the surplus created by the firm together with its incumbent workers. ...
... However, we argue that firms consider only the surplus of their own instead of their incumbent workers. Consequently, firms would stop expanding before reaching the efficient size in Hawkins (2015), and firm-size wage premium arises. Burdett and Mortensen (1998) show that firm-size wage premium arises in a wage-posting model with on-the-job search. ...
... The determination of n is different from that in Hawkins (2015), where the firm and its incumbent workers act as a whole to maximize their overall value surplus. Under this assumption, firms would eventually grow to the efficient size, where the marginal productivity equals the reservation wage. ...
This paper provides a search-theoretic model of the labor market, in which large firms hire workers sequentially and wages are bargained with full commitment. The firm's optimal vacancy-posting strategy trades off the fact that a larger size decreases marginal benefits from subsequent jobs, but avoids higher future recruiting costs attributable to the holdup effect. The holdup effect is dominant if the production function is not sufficiently concave, resulting in firm-size wage premium. The equilibrium features wage dispersion both within and between firms. When calibrated to the U.S. data, the extended model accounts for 67%–84% of the observed wage dispersion, among which 13%–27% is attributed to the holdup effect.
... 16 Hawkins (2015) shows that the Hosios condition is not sufficient for efficiency in the presence of heterogeneity, but that a tax scheme conditional on firms' current productivity can restore efficiency. ...
... He shows that the welfare implications of adjustment costs vary with the relative importance of transitory versus permanent shocks. Finally, Hawkins (2015) discusses the welfare implications of firm's optimal search strategies in an environment that is close to my paper, as it also assumes a discrete firm size. My contribution to this literature is to incorporate an intensive margin, in the form of internal knowledge use, that allows the model to match the empirical dispersion in firm-level correlations. ...
... frictions with multi-worker firms (see Elsby and Michaels (2013), Acemoglu and Hawkins (2014), Schaal (2015), Hawkins (2015), Roys (2016), Cosar et al. (2016)). 32 Indeed, the market tightness θ, which is the ratio of the managers' search intensity to the mass of unemployed searching workers, will indeed never be equal to zero since 1) the mass of workers is finite and 2) managers active in any submarket will always devote some attention to hiring. ...
... He shows that the welfare implications of adjustment costs vary with the relative importance of transitory versus permanent shocks. Finally,Hawkins (2015)discusses the welfare implications of firm's optimal search strategies in an environment that is close to my paper, as it also assumes a discrete firm size. My contribution to this literature is to incorporate an intensive margin, in the form of internal knowledge use, that allows the model to match the empirical dispersion in firm-level correlations. ...
... In this model, the decentralized equilibrium is not optimal, for two main reasons. The first one, called Privately Efficient Recruiting (fromHawkins (2015)), is that managers do not internalize the social gain from hiring a marginal worker. The second one is an extension of the coordination failure in the textbook search-and-matching model, in a set-up where managers are distributed across a countable state space, and where there is scope for a cooperative game. to 1 1−β for each unit of time devoted to hiring, indeed makes the manager internalize the marginal worker's gain from finding a job in states (n, 0) where no puzzles are stored: ...
... Although the first group of articles examines various recruitment scenarios, they do not take advantage of classic mechanism or market design views. These models have quantified the multiple aspects of recruitment and the job market aspects, such as wage dispersion [33], layoff [34], quitting [35], bargaining to enter the firm [36], and bargaining to survive in the firm [37]. ...
The present study introduces a mechanism design theory framework to address the recruitment problem. Moreover, the study examines the features of the mechanism for the payment function based on value engineering. A two-stage model is also proposed for the mechanism based on the investigation of the initial documentation of the workers at the time of recruitment and their performance over the probationary period. The mechanism takes advantage of the concept of value engineering to account for the critical factors in selecting a firm for collaboration from a worker’s perspective, such as wage and subjective preferences. Various features of the mechanism, such as incentive compatibility (honesty) of the worker and the firm, the individual rationality of the worker and the firm, and the ex-post efficiency of the mechanism were investigated based on the proposed wage by introducing the utility function of each agent. Implementing recruitment in the form of a mechanism revealed that value engineering based pricing is a weighted VCG mechanism, and one of the factors in value engineering success would thus be the practical implementation of an optimized model. Examining recruitment in the simple framework of the mechanism alongside the introduction of the proper structure to study the influence of various features of the worker and the firm indicated that it is possible to implement more complex models such as payment function change, message exchange, and release of some assumptions regarding the workers and the firm.
... 14 In a different environment, Hawkins (2015) allows full commitment to a fixed wage. This assumes away wage cuts, and hence delivers efficient vacancy posting. ...
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.
... They defined the use of surface and groundwater resources as objective functions and used the Non-dominated Sorting Genetic Algorithm II (NSGA-II) in order to find Pareto front. Hawkins [26] applied Nash bargaining model for terms of contract between firms and workers. He assumed that firms accept to sign long-term contract with workers. ...
Production scheduling has a considerable impact on productivity and resource assignment. In many situations, every job has an owner, which is called an agent. Since the agents are independent and selfish, it is possible that they have not any incentive to cooperate. Scheduling games help us to understand interactions between the agents. In this study, we consider a real firm with a flow shop manufacturing system that receives various orders from different agents so that each order belongs to a unique agent and includes some jobs. We propose a Nash bargaining model to find a compromise solution among agents. We suppose the utilities of the agents in disagreement point are non-deterministic. Therefore, to overcome this problem, we used linear programming with interval coefficients in order to find the best and the worst Nash bargaining solution. To find a compromised solution, we propose an improved genetic algorithm and compare it with other meta-heuristic algorithms. The comparisons indicate that the proposed algorithm has a good potential to evaluation of Nash bargaining problem in hybrid flow shop environment. Based on the results to reach an agreement between agents, it is required to create a trade-off between usage rates of fastest machines at each stage especially in bottleneck stages and total processing time of orders. The results indicate that the Nash bargaining solution is suitable to solve real-life agent-based production scheduling with the consideration of interactions among the agents when disagreement points are under uncertainty.
... Aa alternative wage determination structure has been proposed by Hawkins (2015), where firms commit to wage contracts so that wages of existing employees are not affected by new hires. The implication of this wage setting mechanism is wage dispersion both within and across firms (unless firms are allowed to pay different lump-sum signing bonuses to its workers). ...
Standard models of labor adjustment assume that firms can change only the size of their workforce (the extensive margin) and not the number of hours of their existing employees (the intensive margin) in response to shocks. I propose a general equilibrium search model that allows for adjustment on both of these margins. The model includes on-the-job search that generates different vacancy filling and attrition rates across firms. I calibrate the model to a unique matched employer–employee panel of Danish firms and simulate two labor market policies aimed at promoting job creation: hiring subsidies and a reduction in the official workweek.
... In this model, the decentralized equilibrium is not optimal, for two main reasons. The first one, called Privately Efficient Recruiting (from Hawkins (2015) ), is that managers do not internalize the social gain from hiring a marginal worker. The second one is an extension of the coordination failure in the textbook search-and-matching model, in a set-up where managers are distributed across a countable state space, and where there is scope for a cooperative game. ...
... In this model, the decentralized equilibrium is not optimal, for two main reasons. The first one, called Privately Efficient Recruiting (from Hawkins (2015) ), is that managers do not internalize the social gain from hiring a marginal worker. The second one is an extension of the coordination failure in the textbook search-and-matching model, in a set-up where managers are distributed across a countable state space, and where there is scope for a cooperative game. ...
This study provides a search and match model with endogenous firm growth, wherein firms post tournament contracts. We show that workers tend to shirk their efforts as firms grow if the right tails of idiosyncratic productivity shocks decay fast enough. Therefore, a dynamic innovation process of the compensation scheme is required to persistently provide incentives. Tournament induces wage dispersion both within and between firms. The quantitative analysis indicates that tournament induces better performances than the quota contract, especially with thin-tailed shock distributions. Nevertheless, with heavy-tailed shock distributions, single-prize schemes induce the involution problem, which reduces the performance improvement of enforcing tournament in large firms. This inefficiency is mitigated by offering prizes to multiple workers.
This paper develops a business cycle search and matching model in which the volatility of employment closely matches that of the U.S. data without wage rigidity and the labor share overshoots in response to productivity shocks. To this end, I introduce an alternative mechanism of wage negotiations and bargaining shocks in an environment where a firm hires more than one worker and the firm faces diminishing marginal product of labor (MPL). When Nash bargaining with a marginal worker breaks down, a firm negotiates wages with existing workers and produces with them. Due to diminishing MPL, the breakdown in the negotiation with the marginal worker negatively affects the bargaining position of the firm with existing workers (one fewer workers) since MPL is higher with one fewer workers. How much the firm internalizes this negative effect depends on stochastic bargaining powers of existing workers which can be identified through labor share data. The stochastic bargaining power of existing workers provides an additional margin to increase the volatility of labor market variables including wages.
Bilateral bargaining between a multiple-worker firm and individual employees leads to overhiring. With a concave production function, the firm can reduce the marginal product by hiring an additional worker, thereby reducing the bargaining wage paid to all existing employees. We show that this externality is amplified when firms can adjust hours per worker as well as employment. Firms keep down workers’ wage demands by reducing the number of hours per worker and the resulting labor disutility. Our finding is particularly relevant for European economies where hours adjustment plays an important role.
We study the quantitative impact of a rise in the minimum wage on macroeconomic outcomes such as employment, the stock of capital and the distribution of wages. Our modeling framework is the large-firm search and matching model. Our comparative statics are in line with previous empirical findings: a moderate increase in the minimum wage barely affects employment, while it compresses the wage distribution and generates positive spillovers on higher wages. The model also predicts an increase in the stock of capital. Next, we perform the policy experiment of introducing a 10 dollar minimum wage. Our results suggest large positive effects on capital (4.0%) and output (1.8%), with a decrease in employment by 2.8%. The introduction of a 9 dollar minimum wage would instead produce similar effects on capital accumulation without harming employment.
We present a generalization of the standard random‐search model of unemployment in which firms hire multiple workers and in which the hiring process is time‐consuming as well as costly. We follow Stole and Zwiebel (1996a, 1996b) and assume that wages are determined by continuous bargaining between the firm and its employees. The model generates a nontrivial dispersion of firm sizes; when firms' production technologies exhibit decreasing returns to labor, it also generates wage dispersion, even when all firms and all workers are ex ante identical. We characterize the steady‐state equilibrium and show that, with a suitably chosen distribution of ex ante heterogeneity across firms, it is consistent with several important stylized facts about the joint distribution of firm size, firm growth, and wages in the U.S. economy. We also conduct a numerical investigation of the out‐of‐steady‐state dynamics of our model. We find that the responses of unemployment and of the vacancy‐to‐unemployment ratio to a shock to labor productivity can be somewhat more persistent than in the Mortensen–Pissarides benchmark where each firm employs a single worker.
I embed a competitive search model of the labor market into a small open economy model with heterogeneous firms and workers. Search frictions generate equilibrium unemployment and income inequality between identical workers, in addition to income differences between skill groups. A quantitative evaluation of the U.S. trade experience suggests that the effect of the increase in goods trade since 1980 may have contributed to the increase in the college premium, but not to the increase in residual inequality.
I study competitive search equilibrium in an environment where firms operate a decreasing‐returns production technology and hire multiple workers simultaneously. Firms post wages, possibly several of them. The equilibrium can feature wage dispersion even though all firms and workers are ex ante identical. Unlike the benchmark where firms hire a single worker, hiring is constrained inefficient. Efficiency requires that firms commit to the number of hires, pay all applicants, or pay wages that depend on the number of applicants. Under wage‐posting, the inefficiency is highest at intermediate levels of labor market tightness.
We analyze the effect of Product Market Regulation (PMR) on unemployment in economies with search frictions and heterogenous multiple-worker firms. The analysis uncovers a new effect whereby regulation truncates the distribution of firm productivities and consequently affects the equilibrium rate of unemployment. Lower period-by-period regulatory costs in- crease the rate of unemployment through this novel selection effect, while they decrease it through the conventional competition effect. In contrast, lower sunk costs associated to en- try regulation always diminish the rate of unemployment. We show econometric evidence consistent with the unemployment effect of sunk versus recurring PMR-induced costs. The calibration of the model uncovers a larger effect of PMR on unemployment than earlier studies, thereby rationalizing findings in cross-country empirical work.
This paper is the first to study vacancies, hires, and vacancy yields at the establishment level in the Job Openings and Labor
Turnover Survey, a large sample of US employers. To interpret the data, we develop a simple model that identifies the flow
of new vacancies and the job-filling rate for vacant positions. The fill rate moves counter to aggregate employment but rises
steeply with employer growth rates in the cross section. It falls with employer size, rises with worker turnover rates, and
varies by a factor of four across major industry groups. We also develop evidence that the employer-level hiring technology
exhibits mild increasing returns in vacancies, and that employers rely heavily on other instruments, in addition to vacancies,
as they vary hires. Building from our evidence and a generalized matching function, we construct a new index of recruiting
intensity (per vacancy). Recruiting intensity partly explains the recent breakdown in the standard matching function, delivers
a better-fitting empirical Beveridge curve, and accounts for a large share of fluctuations in aggregate hires. Our evidence
and analysis provide useful inputs for assessing, developing, and calibrating theoretical models of search, matching, and
hiring in the labor market. JEL Codes: D21, E24, J60.
Firms are the field of several strategic interactions that standard neo-classical analysis often ignores. Such strategic considerations concern relations between capital owner and labor, relations between marginal employees and incumbents and more generally all relations between different groups within the firm with different bargaining positions. This Paper provides a synthetic model of the labor market equilibrium with search frictions in a dynamic framework where wage bargaining is influenced by within-firm strategic interactions, with explicit closed form solutions. We then explore systematically within firm strategic interactions and shed new light on the micro and macroeconomic consequences of conflicts on wages, unemployment and capital accumulation. First, we recover the partial equilibrium over-employment phenomenon put to the fore by Stole and Zwiebel (1996a,b) at the firm level, according to which the bargaining power of workers increases employment. Further, with heterogeneous labor, higher relative bargaining power for some groups leads quite generally to over-employment relative to other groups, those other groups being under-employed if they have a lower relative bargaining power. The over-employment results do not necessarily hold at the macroeconomic level, however. Quantitative exercises suggest that the bargaining power of workers is actually detrimental to employment when labor is considered as an homogeneous input. Finally, the hold-up problem between capital owners and employees does not necessarily lead to under-investment in physical capital as it is usually the case. Actually, strategic over-employment can induce over-investment when employees substitutable to capital have strong bargaining power.
This paper develops a new framework for examining the determinants of wage distributions that emphasizes within-industry reallocation, labor market frictions, and differences in workforce composition across firms. More productive firms pay higher wages and exporting increases the wage paid by a firm with a given productivity. The opening of trade enhances wage inequality and can either raise or reduce unemployment. While wage inequality is higher in a trade equilibrium than in autarky, gradual trade liberalization first increases and later decreases inequality. Copyright 2010 The Econometric Society.
This paper provides a rationale for employment protection based on the interaction between the firm's decision on firing and the wage bargaining process with its workers. We develop a matching and intrafirm bargaining model where large firms hire workers on a frictional labor market and decide to destroy low productivity jobworker matches. The coexistence of entry and exit worker flows gives rise to a specific interaction between the firing decision and the wage bargaining process. This interaction causes inefficient decisions for hiring and firing and numerical simulations show that a combination of firing taxes and severance payments leads to an efficient labor market.
The introduction of firm size into labor search models raises the question how wages are set when average and marginal product differ. We develop and analyze an alternative to the existing bargaining framework: Firms compete for labor by publicly posting long-term contracts. In such a competitive search setting, firms achieve faster growth not only by posting more vacancies, but also by offering higher lifetime wages that attract more workers which allows to fill vacancies with higher probability, consistent with empirical regularities. The model also captures several other observations about firm size, job flows, and pay. In contrast to bargaining models, efficiency obtains on all margins of job creation and destruction, both with idiosyncratic and aggregate shocks. The planner solution allows a tractable characterization which is useful for computational applications.
This paper explores the effects of tariffs, trade costs, and firing costs on firm dynamics and labor markets outcomes. The analysis is based on a general equilibrium model with labor market search frictions, wage bargaining, firing costs, firm-specific productivity shocks, and endogenous entry/exit decisions. Firing costs reduce firms' profits and discourage them from quickly adjusting their employment levels in response to idiosyncratic shocks. Tariffs and other trade costs reduce rents for efficient firms and increase rents for inefficient firms, as in Melitz (2003). These well-known effects interact with idiosyncratic productivity shocks and with scale economies in hiring costs to determine the equilibrium size distribution of firms, entry/exit rates, job turnover rates, rate of informality, and cross-firm wage distributions. After fitting this model to Colombian micro data on establishments and households, we use counter- factual simulations to isolate the effects of that country's trade liberalization and labor market reforms circa 1990. We find that Colombia's tariff cuts, in isolation, would have shifted jobs toward large, stable firms, reducing job turnover and informality in the long run. Further, since firms pay higher wages when they wish to rapidly expand, the shift of jobs toward such firms would have compressed the top end of the wage distribution. On the other hand, Colombia's firing costs reductions, in isolation, would have led some large inefficient producers to contract, driving up job turnover rates and informality. Finally, however, the combination of tariff cuts and reduced firing costs that was implemented led to larger increases in turnover and informality than would have occurred if tariffs had been held fixed. The reason is that reduced firing costs made firms adjust their sales more dramatically in response to productivity shocks, while openness amplified this effect by making adjustments on the export margin more important.
The authors consider six explanations for the positive relationship between employer size and wages: large employers (1) hire higher-quality workers, (2) offer inferior working conditions, (3) make more use of high wages to forestall unionization, (4) have more ability to pay high wages, (5) face smaller pools of applicants relative to vacancies, and (6) are less able to monitor their workers. They find some support for the first of these, but there remains a significant wage premium for those working for large employers. Copyright 1989 by University of Chicago Press.
In this paper, the author constructs an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters. He shows that the equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay. Copyright 1997 by the University of Chicago.
This paper exploits a rich and largely untapped source of information on the wages and other characteristics of individual manufacturing plants to cast new light on recent changes in the United States wage structure. Our primary data source, the Longitudinal Research Datafile (LRD) , contains observations on more than 300,000 manufacturing plants during Census years (1963, 1967, 1972, 1977, 1982) and 50,000-70,000 plants during intercensus years since 1972. We use the information in the LRD to investigate changes in the plant-wage structure over the past three decades. We also combine plant-level wage observations in the LRD with wage observations on individual workers in the Current Population Survey (CPS) to estimate the between-plant and within-plant components of overall wage dispersion.
In search of a macroeconomic theory of wage determination, the agnostic reader should be puzzled by the apparent contradiction between two influential theories. On one hand, in the standard search-matching theory with wage bargaining, hiring cost and constant returns of labor, the bargaining power of employees allows them to get rents and gives rise either to over-employment or to under-employment compared with the first-best. On the other hand, in Stole and Zwiebel’s theory of intrafirm bargaining with no hiring cost and decreasing returns of labor, the bargaining power of employees does not allow them to get rent and always gives rise to over-employment. In this paper, we try to reconcile the approaches. A simple matching model with large firms and diminishing marginal productivity of labor allows us to show that the two limit cases described above yield a mix of robust and non robust results: In the most general case, employees get rents and there is more frequently over-employment compared to the efficient allocation than in the standard search-matching model.
We study positive and normative aspects of steady-state equilibrium in a market where firms of endogenous size experience
idiosyncratic shocks and undergo a costly search process to hire their workers. The stylized model we propose highlights interactions
between job-security provisions and sectoral shocks in determining the natural rate of unemployment, the allocation of labour,
and the extent of labour hoarding, and rationalizes cross-sectional asymmetries of gross employment flows at the firm level.
In our model, where productivity and search costs are dynamically heterogeneous across firms, decentralized wage bargains
imply important cross-sectional inefficiencies, which overshadow the static search inefficiencies on which simpler models
focus.
In Becker's (1973) neoclassical marriage market model, matching is positively assortative if types are complements: i.e. match output f(x, y) is supermodular in x and y. We reprise this famous result assuming timeintensive partner search and transferable output. We prove existence of a search equilibrium with a continuum of types, and then characterize matching. After showing that Becker's conditions on match output no longer su#ce for assortative matching, we find su#cient conditions valid for any search frictions and type distribution: supermodularity not only of output f , but also of log f x and log f xy . Symmetric submodularity conditions imply negatively assortative matching. Examples show these conditions are necessary. Keywords: Search Frictions, Matching, Assignment 1.
We study the variability of business growth rates in the U.S. private sector from 1976 onwards. To carry out our study, we exploit the recently developed Longitudinal Business Database (LBD), which contains annual observations on employment and payroll for all U.S. businesses. Our central finding is a large secular decline in the cross sectional dispersion of firm growth rates and in the average magnitude of firm level volatility. Measured the same way as in other recent research, the employment-weighted mean volatility of firm growth rates has declined by more than 40 percent since 1982. This result stands in sharp contrast to previous findings of rising volatility for publicly traded firms in COMPUSTAT data. We confirm the rise in volatility among publicly traded firms using the LBD, but we show that its impact is overwhelmed by declining volatility among privately held firms. This pattern holds in every major industry group. Employment shifts toward older businesses account for 27 percent or more of the volatility decline among privately held firms. Simple cohort effects that capture higher volatility among more recently listed firms account for most of the volatility rise among publicly traded firms.
We present a generalization of the standard random-search model of unemployment in which firms hire multiple workers and in which the hiring process is time-consuming as well as costly. We follow Stole and Zwiebel (1996a,b) and assume that wages are determined by continuous bargaining between the firm and its employees. This gener-ates a non-trivial dispersion of firm sizes; when firms' production technologies exhibit decreasing returns to labor, it also generates wage dispersion, even though all firms and all workers are ex ante identical. We characterize the steady-state equilibrium of the model; some important special cases are characterized in closed form. We also characterize the out-of-steady state dynamics of employment and wages in response to productivity shocks. Firms can respond to shocks on both an intensive margin (a change in the intensity of vacancy posting of incumbent firms) and extensive margin (a change in the number of active firms); we show that both margins, as well as whether there are decreasing returns to labor at the firm level, are important for the qualitative behavior of the unemployment rate and of the distribution of employment and wages across firms. When there are decreasing returns to labor and free entry of firms, the responses of unemployment and of the vacancy to unemployment ratio to a shock to labor productivity are significantly more persistent than in the Mortensen-Pissarides benchmark. The persistence is caused by a novel mechanism arising from an inter-action of two key elements of our model: new entrant firms are small for some time because hiring is time-consuming and they pay high wages because of bargaining; this drives up wages for other firms and slows down job creation.
This paper analyzes the effect of product market regulation (PMR) on unemployment in a search model with heterogeneous multiple-worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs decrease unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003, Quarterly Journal of Economics, 118, 879–907). Firm heterogeneity magnifies the impact of both types of regulatory costs. We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs.
the incentive to adjust the workforce. I relax this assumption and introduce wage bargaining with multiple workers. A reduced-form empirical decomposition suggests that transitory shocks to sales have a strong effect on wages, but that permanent shocks have a very small effect on wages. I propose and estimate a structural model of firm behavior that can account for these dynamics: firms adjust relatively less the workforce in response to temporary shocks, leading to higher wages since the labor productivity goes up. The model is estimated using French panel data, through a new indirect inference procedure which allows for heterogeneity in firm parameters. The model fits the data well. Only a small amount of adjustment costs is needed to reproduce observed job reallocation and inaction rates. Permanent shocks are the most important source of output uctuations. Ignoring measurement errors or wage exibility lead to erroneous conclusions. The model with heterogeneous coefficients greatly improves the fit of the observed dispersion of labor productivity compared to a model with homogeneous coeffcients.
We find that, across OECD countries, there is a strong link between the rate of self employment and the intensity of both product- and labor-market regulations. The sensitivity of the self-employment rate to regulation appears greater in terms of statistical significance and magnitude than the sensitivity of unemployment. We then develop a model of rent creation and division featuring product and labor market policies. The calibrated model accounts broadly for these features of the data. We also use the model to look at the effect of labor market and product market regulations on the different constituencies in the economy.
For the equilibrium of a frictional labor market to be efficient, firms and workers must face the socially optimal incentives for entry and hiring decisions. One important approach to modeling search frictions in decentralized labor markets is competitive search equilibrium, in which workers direct their search towards wages that firms commit to pay them if hired. In an environment in which each firm wishes to hire precisely one worker, it is known that the competitive search equilibrium is efficient. In this paper, I show that if firms wish to employ more than one worker, then hiring will not generally be efficient if firms can post only a single wage. Efficiency requi res that firms be able to commit to hire a fixed number of workers at a given wage, to pay all applicants, or to make wages contingent on the number of applicants. I show that if firms post only a wage, the amount of inefficiency is highest at intermediate levels of labor market tightness. Efficiency under wage posting is restored in a dynamic model if the duration for which firms commit to posted contracts becomes small. The model also provides a framework for investigating the interaction of wages, labor market conditions, within- firm wage policies, and the growth of firms.
The authors study vacancies, hires, and vacancy yields (success rate in generating hires) in the Job Openings and Labor Turnover Survey, a large representative sample of U.S. employers. The authors also develop a simple framework that identifies the monthly flow of new vacancies and the job-filling rate for vacant positions, the employer counterpart to the job-finding rate for unemployed workers. The job-filling rate moves counter to employment at the aggregate level but rises steeply with employer growth rates in the cross section. It falls with employer size, rises with the worker turnover rate, and varies by a factor of four across major industry groups. The authors' analysis also indicates that more than 1 in 6 hires occur without benefit of a vacancy, as defined by JOLTS. These findings provide useful inputs for assessing, developing, and calibrating theoretical models of search, matching, and hiring in the labor market.
Matched employer-employee data exhibits both wage and productivity dispersion across firms and suggest that a linear relationship holds between the average wage paid and a firm productivity. The purpose of this paper is to demonstrate that these facts can be explained by a search and matching model when firms are heterogenous with respect to productivity, are composed of many workers, and face diminishing returns to labor given the wage paid to identical workers is the solution to the Stole-Zwiebel bilateral bargaining problem. Helpman and Iskhoki (2008) show that a unique single wage (degenerate) equilibrium solution to the model exists in this environment. In this paper, I demonstrate that another equilibrium exists that can be characterized by a non-degenerate distribution of wages in which more productive firms pay more if employed workers are able to search. Generically this dispersed wage equilibrium is unique and exists if and only if firms are heterogenous with respect to factor productivity. Finally, employment is lower in the dispersed wage equilibrium than in the single wage equilibrium but this fact does not imply that welfare is higher in the single wage equilibrium.
We study a two-country, two-sector model of international trade in which one sector produces homogeneous products and the other produces differentiated products. Both sectors are subjected to search and matching frictions in the labour market and wage bargaining. As a result, some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labour markets, such as efficiency of matching and costs of posting vacancies, which can vary across the sectors. The differentiated-product industry has firm heterogeneity and monopolistic competition. We study the interaction of labour market rigidities and trade impediments in shaping welfare, trade flows, productivity, and unemployment. We show that both countries gain from trade. A country with relatively lower frictions in the differentiated-product industry exports differentiated products on net. A country benefits from lowering frictions in its differentiated sector's labour market, but this harms the country's trade partner. Alternatively, a simultaneous, proportional lowering of labour market frictions in the differentiated sectors of both countries benefits both of them. The opening to trade raises a country's rate of unemployment if its relative labour market frictions in the differentiated sector are low, and it reduces the rate of unemployment if its relative labour market frictions in the differentiated sector are high. Cross-country differences in rates of unemployment exhibit rich patterns. In particular, lower labour market frictions do not ensure lower unemployment, and unemployment and welfare can both rise in response to falling labour market frictions and falling trade costs. Copyright © 2010 The Review of Economic Studies Limited.
I construct a directed search model in which firms decide whether to enter a market and how many positions to create. Within this framework, the number of firms and the size of each firm are determined endogenously, wages play an allocative role in the matching process, and the frictions inherent in this process derive from the equilibrium behavior of workers and firms. I characterize the (unique) equilibrium. Comparative statics generate testable implications for cross-sectional variation in matching efficiency, as well as the dynamic behavior of vacancies and unemployment. Moreover, allowing for ex-ante heterogeneity across firms, the model can easily and naturally generate the observed relationship between firm size, wages, profitability, and hiring.
We introduce search unemployment into Melitz's trade model. Firms' monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.
We analyze the welfare and employment effects of different wage bargaining regimes. Within the large firm search model, we show that collective bargaining affects employment
via two channels. Collective bargaining exerts opposing effects on job creation and wage setting. Firms have a stronger incentive for strategic employment, while
workers benefit from the threat of a strike. We find that the employment increase due to the strategic motive is dominated by the employment decrease due to the increase in
workers' threat point. In aggregate equilibrium, employment is ineciently low under collective bargaining. But it is not always true that equilibrium wages exceed those
under individual bargaining. If unemployment benefits are sufficiently low, collectively bargained wages are smaller. The theory sheds new light on policies concerned with
strategic employment and the relation between replacement rates and the extent of collective wage bargaining.
Little is known about the search strategy that employers use in their efforts to fill job vacancies. In this article, the authors analyze unique micro data to study this search strategy. They conclude that almost all vacancies are filled from a pool of applicants that is formed shortly after the posting of the vacancy. Hence, vacancy durations should be interpreted as selection periods and not as search periods for applicants. Copyright 1992 by University of Chicago Press.
This paper proposes a new theory of the size distributions of business firms. It postulates an underlying distribution of persons by managerial "talent" and then studies the division of persons into managers and employees and the allocation of productive factors across managers. The implications of the theory for secular changes in average firm size are developed and tested on U.S. time series.
This paper demonstrates that in a free entry search and bargaining economy with concave production firms over-employ. Bargaining allows the worker's wage to depend upon marginal productivity. As such, with strictly concave production, the wage declines as firms employ more labour. Firms react to this declining wage function by choosing an inefficiently large number of workers. However, in equilibrium, fewer firms are likely to enter causing aggregate employment and vacancies to fall. (Copyright: Elsevier)
We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual bargaining. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980's and 1990's could be directly attributed to product market deregulation. Under our baseline calibration, our results suggest that a decrease of less than two-tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount. (Copyright: Elsevier)
Much recent research has sought to explain the cyclical amplitude of unemployment fluctuations in the US. This paper shows that amplification of the cyclical variation of unemployment can be obtained from adding two very simple features to an otherwise standard model of the aggregate labor market, namely downward sloped short run labor demand and endogenous job destruction. This generalized model is able to match more closely the cyclicality of both job finding and employment to unemployment flows observed in US data. Contrary to standard models, the model can generate amplification while maintaining realistic surplus to employment relationships. In addition, we uncover a novel source of amplification of cyclical shocks that is generated by the interaction of countercyclical unemployment inflows and job creation.
In Becker's (1973) neoclassical marriage market model, matching is positively assortative if types are complements: i.e., match output f(x, y) is supermodular in x and y. We reprise this famous result assuming time-intensive partner search and transferable output. We prove existence of a search equilibrium with a continuum of types, and then characterize matching. After showing that Becker's conditions on match output no longer suffice for assortative matching, we find sufficient conditions valid for any search frictions and type distribution: supermodularity not only of output f, but also of log f(x) and log f(xy). Symmetric submodularity conditions imply negatively assortative matching. Examples show these conditions are necessary.
This article provides a model of labor market equilibrium with search and within-firm strategic bargaining. We yield explicit closed form solutions with heterogeneous labor inputs and capital. The solution exhibits overemployment. We show that higher relative bargaining power for some groups of workers may lead to overemployment relative to other groups, with such other groups being underemployed instead if they have a lower relative bargaining power. Similarly, the hold-up problem between capitalists and employees does not necessarily lead to underinvestment in physical capital. Copyright © 2008 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
The authors consider a wide number of applications of an intrafirm bargaining game within organizations where employees and the firm engage in wage negotiations. Under their presumption that contracts cannot bind employees to the organization, the resulting stable wage and profit profiles give rise to an objective function for the firm that places weight on inframarginal profits in an economically significant manner. The authors in turn employ this methodology to explore applications of organizational design, hiring and capital decisions, training and cross-training, the importance of labor and asset specificity, managerial hierarchies, preferences for unionization, responses to competition, and internal capital budgeting. Copyright 1996 by American Economic Association.
We survey the microfoundations, empirical evidence and estimation issues underlying the aggregate matching function. Several microeconomic matching mechanisms have been suggested in the literature with some successes but none is generally accepted as superior to all others. Instead, an aggregate matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. The Cobb-Douglas restrictions with constant returns to scale perform well. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research.
This paper surveys the microfoundations, empirical evidence, and estimation issues underlying the aggregate matching function. There is no consensus yet on microfoundations but one is emerging on estimation. An aggregate, constant returns, Cobb-Douglas matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research. The paper discusses spatial aggregation issues, and implications of on-the-job search and of the timing of stocks and flows for estimated matching functions.
This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemployment-vacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.
This paper examines an employment relation in which individual workers enjoy some bargaining power vis-a-vis the firm although they are not unionized. The main elements of the situations studied here are that the employment contracts are non-binding across periods of production and that the firm has opportunities to replace workers. The paper analyzes a dynamic model in which the processes of contracting and recontracting between the firm and its workers are intertwined with the dynamic evolution of the firm's workforce. The analysis of the model is somewhat complicated because the employment level is a nondegenerate state variable that evolves over time and is affected by past decisions. The main analytical results characterize certain important equilibria: the profit maximizing and stationary equilibria. The unique stationary equilibrium is markedly inefficient: it exhibits inefficient over-employment and the steady state wages coincide with the workers' reservation wage. It confirms earlier results derived by Stole and Zwiebel (1996a, b) in the context of a static model and shows that they are very robust even when the firm has nearly frictionless hiring opportunities. In contrast, in the profit maximizing equilibrium the outcome is nearly efficient and the wage exhibits a mark-up over the reservation wage.
We present a new methodology for studying the problem of intra-firm bargaining, based on the notion that contracts cannot
commit the firm and its agents to wages and employment. We develop and analyse a general non-cooperative multilateral bargaining
framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party. Equilibrium
firm profits are characterizable as both a weighted average of a neo-classical (non-bargaining) firm's profits and a generalization
of Shapley value for a corresponding cooperative game. Furthermore, the resulting payoffs induce economically significant
distortions in the firm's input and organizational-design decisions.
This paper describes a simple framework for evaluating the allocative performance of economies characterized by trading frictions
and unemployment. This framework integrates the normative results of earlier Diamond-Mortensen-Pissarides bilateral matching-bargaining
models of trade coordination and price-setting, and consists of a set of general conditions for constrained Pareto efficient
resource allocation that are applicable to conventional natural rate models. To illustrate, several conventional models of
the labour market are reformulated as matching-bargaining problems and analyzed using this framework.
One of the perennial problems of business cyde theory has been the search for a convincing empirical description and theoretical explanation of the behaviour of wage rates during fluctuations in output and employment. Even the empirical question is hardly settled, although the most recent careful study (Geary and Kennan) confirms the prevailing view that real-wage movements are more or less independent of the business cycle. There are really two subquestions here. The first presumes that nominal wage stickiness is the main route by which nominal disturbances have real macroeconomic effects, and asks why nominal wages should be sticky. The second focuses on real wages, and asks why fluctuations in the demand for labour should so often lead to large changes in employment and small, unsystematic, changes in the real wage.
A natural holdup problem arises in a market with search frictions: firms have to make a range of investments before finding their employees and larger investments translate into higher wages. In particular, when wages are determined by ex post bargaining, the equilibrium is always ine#cient: recognizing that capital intensive production relations have to pay higher wages, firms reduce their investments. This can only be prevented by removing all the bargaining power from the workers, but this in turn depresses wages below their social product, and creates excessive entry of firms. In contrast to this benchmark, we show that e#ciency is achieved when firms post wages and workers can direct their search towards more attractive o#ers. This e#ciency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage o#ers. We show that the underlying reason for e#ciency is not wage posting per se, but the ability of workers to direct their search towards more capital intensive jobs. Keywords: E#ciency, Holdup, Search, Wage Posting. JEL Classification: 83 # We thank two anonymous referees, Jonathan Levin, and seminar participants at MIT, NBER and Society for Economic Dynamics Conference. 1
Identifying the Nature of Bargaining between Workers and Large Firms” in prep. 46 rHelpman, Elhanan, and Oleg ItskhokiLabour Market Rigidities, Trade and Unem-ployment
- William B Hawkins
Hawkins, William B. 2011. “Identifying the Nature of Bargaining between Workers and Large Firms.” in prep. 46 rHelpman, Elhanan, and Oleg Itskhoki. 2010. “Labour Market Rigidities, Trade and Unem-ployment.” Review of Economic Studies, 77(3): 1100–1137
Product Market Regulation, Firm Selection and Unemployment Institute for the Study of Labor (IZA) Discussion Paper
- Gabriel Felbermayr
- Julien Prat
Felbermayr, Gabriel, and Julien Prat. 2007. " Product Market Regulation, Firm Selection and
Unemployment. " Institute for the Study of Labor (IZA) Discussion Paper 2754.