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Equilibrium Labor Turnover, Firm Growth, and Unemployment

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  • Melvyn G. Coles
  • Dale T. Mortensen

Abstract

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.

Suggested Citation

  • Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, January.
  • Handle: RePEc:wly:emetrp:v:84:y:2016:i::p:347-363
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    References listed on IDEAS

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    1. Giuseppe Moscarini & Fabien Postel-Vinay, 2013. "Stochastic Search Equilibrium," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1545-1581.
    2. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    3. Monika Merz & Eran Yashiv, 2007. "Labor and the Market Value of the Firm," American Economic Review, American Economic Association, vol. 97(4), pages 1419-1431, September.
    4. Jean‐Marc Robin, 2011. "On the Dynamics of Unemployment and Wage Distributions," Econometrica, Econometric Society, vol. 79(5), pages 1327-1355, September.
    5. Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," American Economic Review, American Economic Association, vol. 100(2), pages 327-332, May.
    6. Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, January.
    7. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j003nctkn is not listed on IDEAS
    8. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    9. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    10. Rasmus Lentz & Dale T. Mortensen, 2008. "An Empirical Model of Growth Through Product Innovation," Econometrica, Econometric Society, vol. 76(6), pages 1317-1373, November.
    11. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
    12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    13. Dale T. Mortensen & Bent Jesper Christensen & Jesper Bagger, 2010. "Wage and Productivity Dispersion: Labor Quality or Rent Sharing?," 2010 Meeting Papers 758, Society for Economic Dynamics.
    14. Weiss, Andrew W, 1980. "Job Queues and Layoffs in Labor Markets with Flexible Wages," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 526-538, June.
    15. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
    16. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
    17. Melvyn G. Coles, 2001. "Equilibrium Wage Dispersion, Firm Size and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 159-187, January.
    18. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    Cited by:

    1. Henry Hyatt & Erika McEntarfer & John Haltiwanger, 2014. "Cyclical Reallocation of Workers Across Large and Small Employers," 2014 Meeting Papers 735, Society for Economic Dynamics.
    2. Carlos Carrillo-Tudela, 2010. "Job Search, Human Capital and Wage Inequality," 2010 Meeting Papers 723, Society for Economic Dynamics.
    3. David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 13-70.
    4. Ken Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2016. "Wage Inequality: A Structural Decomposition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 20-37, January.
    5. Jeremy Lise & Jean-Marc Robin, 2017. "The Macrodynamics of Sorting between Workers and Firms," American Economic Review, American Economic Association, vol. 107(4), pages 1104-1135, April.
    6. Pessoa de Araujo, Ana Luisa, 2017. "Wage Inequality and Job Stability," Working Papers 5, Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute.
    7. Faccini, Renato & Yashiv, Eran, 2017. "The importance of hiring frictions in business cycles," LSE Research Online Documents on Economics 87171, London School of Economics and Political Science, LSE Library.
    8. Jeremy Lise & Jean-Marc Robin, 2017. "The Macrodynamics of Sorting between Workers and Firms," American Economic Review, American Economic Association, vol. 107(4), pages 1104-1135, April.
    9. Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, January.
    10. Ken Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2015. "Wage Inequality," Working Papers 2015-42, Peruvian Economic Association.
    11. Ana Luisa Pessoa Araujo, 2018. "Wage Inequality and Job Stability," 2018 Meeting Papers 117, Society for Economic Dynamics.
    12. repec:iza:izawol:journl:2017:n:371 is not listed on IDEAS

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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