Econometrica: Jan 2016, Volume 84, Issue 1

Equilibrium Labor Turnover, Firm Growth, and Unemployment

https://doi.org/10.3982/ECTA10700
p. 347-363

Melvyn G. Coles, Dale T. Mortensen

This paper considers equilibrium quit turnover in a frictional labor market with costly hiring by firms, where large firms employ many workers and face both aggregate and firm specific productivity shocks. There is exogenous firm turnover as new (small) startups enter the market over time, while some existing firms fail and exit. Individual firm growth rates are disperse and evolve stochastically. The paper highlights how dynamic monopsony, where firms trade off lower wages against higher (endogenous) employee quit rates, yields excessive job‐to‐job quits. Such quits directly crowd out the reemployment prospects of the unemployed. With finite firm productivity states, stochastic equilibrium is fully tractable and can be computed using standard numerical techniques.

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