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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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    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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