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Firm Dynamics, On-the-Job Search, and Labor Market Fluctuations
[Optimal Investment with Costly Reversibility]

Author

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  • Michael W L Elsby
  • Axel Gottfries

Abstract

We devise a tractable model of firm dynamics with on-the-job search. The model admits analytical solutions for equilibrium outcomes, including quit, layoff, hiring, and vacancy-filling rates, as well as the distributions of job values, a fundamental challenge posed by the environment. Optimal labor demand takes a novel form whereby hiring firms allow their marginal product to diffuse over an interval. The evolution of the marginal product over this interval endogenously exhibits gradual mean reversion, evoking a notion of imperfect labor market competition. This in turn contributes to dispersion in marginal products, giving rise to endogenous misallocation. Quantitatively, the model provides a parsimonious reconciliation of leading estimates of rent sharing, the negative association between wages and quits, the link between job and worker flows, and the cyclicality of labor market quantities and prices.

Suggested Citation

  • Michael W L Elsby & Axel Gottfries, 2022. "Firm Dynamics, On-the-Job Search, and Labor Market Fluctuations [Optimal Investment with Costly Reversibility]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1370-1419.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:3:p:1370-1419.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab054
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    Cited by:

    1. Gottfries, Axel & Teulings, Coen, 2023. "Returns to on-the-job search and wage dispersion," Labour Economics, Elsevier, vol. 80(C).
    2. Faia, Ester & Ottaviano, Gianmarco & Spinella, Saverio, 2022. "Robot Adoption, Worker-Firm Sorting and Wage Inequality: Evidence from Administrative Panel Data," CEPR Discussion Papers 17451, C.E.P.R. Discussion Papers.

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