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An Equilibrium Model of the Labor Market with Endogenous Capital and Two-Sided Search

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  • Jean-Marc ROBIN
  • Sébastien ROUX

Abstract

In this paper we extend the equilibrium search models of Burdett and Mortensen [1998], Burdett and Vishwanath [1988] and Mortensen and Vishwanath [1994] to allow for endogenous matching and endogenous capital determination. In our model, in order to attract a positive measure of workers, firms must produce a specific hiring effort which is by itself costly (cost of advertising posts, training new employees). Workers then draw firms in proportion to their hiring effort. Moreover, as in the model of Acemoglu and Shimer [1997], upon entering the market firms must choose a determined amount of capital which is then fixed for ever and indexes labour productivity. We characterize the equilibrium and derive expressions for the endogenous equilibrium wage distributions. In particular, we show that with convex or concave hiring costs, the Nash equilibrium of the equilibrium search game is such that all operating firms must choose a different amount of capital from a continuous distribution, and a one-to-one mapping exists between capital and wages. We calibrate the model on French firm data and proceed to various simulations of tax reforms. We thus show that a reform which transfers labour taxes from low wages to high wages, by reducing the monopsony power of large firms, is welfare improving: unemployment is reduced, total output is increased as well as government revenue.

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Bibliographic Info

Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2002)
Issue (Month): 67-68 ()
Pages: 257-307

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Handle: RePEc:adr:anecst:y:2002:i:67-68:p:11

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Cited by:
  1. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  2. Chéron, Arnaud & Hairault, Jean-Olivier & Langot, François, 2008. "A quantitative evaluation of payroll tax subsidies for low-wage workers: An equilibrium search approach," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 817-843, April.
  3. Naoki Aizawa & Hanming Fang, 2013. "Equilibrium Labor Market Search and Health Insurance Reform," PIER Working Paper Archive 13-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Postel Vinay Fabien & Robin Jean Marc, 2000. "Wage Dispersion with Heterogeneous Firm Technologies and Worker Abilities: An Equilibrium Job Search Model for Matched Employer-Employee Data," Research Unit Working Papers 0008, Laboratoire d'Economie Appliquee, INRA.
  5. Garcia-Perez, J.I., 1999. "Equilibrium Search Models: the Role of the Assumptions," Papers 9909, Centro de Estudios Monetarios Y Financieros-.
  6. Gerard J. van den Berg & Aico van Vuuren, 2002. "The Effect of Search Frictions on Wages," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C1-2, International Conferences on Panel Data.
  7. Chéron, Arnaud & Hairault, Jean-Olivier & Langot, François, 2004. "Labor Market Institutions and the Employment-Productivity Trade-Off: A Wage Posting Approach," IZA Discussion Papers 1364, Institute for the Study of Labor (IZA).

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