Efficient Firm Dynamics in a Frictional Labor Market

Abstract

We develop and analyze a labor search model in which heterogeneous firms operate under decreasing returns and compete for labor by publicly posting long-term contracts. Firms achieve faster growth 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 existing 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.

Aggregate Recruiting Intensity

“…We conclude that the key transmission mechanism of our model, the slackness effect, is different from that emphasized by Kaas and Kircher (2015).…”

“…Finally, while aggregate recruiting intensity drops after a negative aggregate shock in both our model and theirs, the reasons for the drop fundamentally differ. Kaas and Kircher (2015) argue that the drop depends on recruiting intensity being a concave function of firms' hiring policies, whose dispersion across firms increases after a negative shock.…”

“…Without firm heterogeneity, they are unable to speak to the cross-sectional empirical evidence that recruiting intensity is tightly linked to firm growth rates, a key observation that we use to discipline our framework and assess the magnitude of the composition effect. Kaas and Kircher (2015) is the only other paper that focuses on heterogeneous job-filling rates across firms. In their directed search environment, different firms post distinct wages that attract job seekers at differential rates, whereas we study how firms' costly recruiting activities determine differential job-filling rates.…”

“…From our discussion of equations (11) and (12), recall that the cross-sectional elasticity of the job-filling rate to employment growth, estimated to be 0.82 by DFH, is a function of the ratio of these two elasticities. 18 The second moment used to 16 See Elsby and Michaels (2013) and Kaas and Kircher (2015) for examples of the use of heterogeneity in permanent productivity. 17 In the numerical solution and simulation of the model, z remains a continuous state variable.…”

Sorting through Search and Matching Models in Economics

“…He shows that the outcome is inefficient and leads to overemployment, with firm size larger than optimal. Kaas and Kircher (2015) and Schaal (forthcoming) propose a directed-search model with large firms, finding that price posting with coordination frictions yields a constrained efficient surplus division. These search models can handle realistic environments where firms hire multiple workers and technology is nonadditive.…”