Industry Dynamics and Search in the Labor Market

The paper proposes a model of on- and off-the-job search that combines convex hiring costs and directed search. Firms permanently differ in productivity levels, their production function features constant or decreasing returns to scale, and search costs are convex in search intensity. Wages are determined in a competitive manner, as firms advertise wage contracts (expected discounted incomes) so as to balance wage costs and search costs (queue length). An important assumption is that a firm is able to sort out its coordination problems with their employees in such a way that the on-the-job search behavior of workers maximizes the match surplus. Our model has several interesting features. First, it is close in spirit to the competitive model, with a tractable and unique equilibrium, and is therefore useful for empirical testing. Second, the resulting equilibrium gives rise to an efficient allocation of resources. Third, the equilibrium is characterized by a job ladder: unemployed workers search for low-productivity, low-wage firms. Workers in low-wage firms search for firms slightly higher on the productivity/ ladder, and so forth up to the workers in the second most productive firms who only apply to the most productive firms. Finally, the model rationalizes empirical regularities of on-the-job search and labor turnover. First, job-to job mobility falls with average firm tenure and firm size. Second, wages increase with firm size, and wage growth is larger in fast-growing firms.