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Equilibrium Labor Turnover, Firm Growth and Unemployment

  • Melvyn G. Coles
  • Dale T. Mortensen

This paper considers a dynamic, non-steady state environment in which wage dispersion exists and evolves in response to shocks. Workers do not observe firm productivity and firms do not commit to future wages, but there is on-the-job search for higher paying jobs. The model allows for firm turnover (new start-up firms are created, some existing firms die) and firm specific productivity shocks. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Consequently, workers always quit to firms paying a higher wage and so move efficiently from less to more productive firms. As a further implication of the cost structure assumed, endogenous firm size growth is consistent with Gibrat's law. The paper provides a complete characterization and establishes existence and uniqueness of the separating (non-steady state) equilibrium in the limiting case of equally productive firms. The existence of equilibrium with any finite number of firm types is also established. Finally, the model provides a coherent explanation of Danish manufacturing data on firm wage and labor productivity dispersion as well as the cross firm relationship between them.

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File URL: http://www.nber.org/papers/w18022.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18022.

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Date of creation: Apr 2012
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Publication status: published as Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, 01.
Handle: RePEc:nbr:nberwo:18022
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  1. 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 19 pages.
  2. Fabien Postel-Vinay & Giuseppe Moscarini, 2013. "Stochastic Search Equilibrium," 2013 Meeting Papers 159, Society for Economic Dynamics.
  3. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  4. Jakob Klette & Samuel Kortum, 2002. "Innovating firms and aggregate innovation," Staff Report 300, Federal Reserve Bank of Minneapolis.
  5. 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 526-38, June.
  6. 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.
  7. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j003nctkn is not listed on IDEAS
  8. Jean-Marc Robin, 2011. "On the Dynamics of unemployment and wage Distributions," Post-Print hal-01024463, HAL.
  9. Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute for the Study of Labor (IZA).
  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. 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.
  12. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
  13. Coles, Melvyn G. & Mortensen, Dale T., 2012. "Equilibrium labour turnover, firm growth and unemployment," ISER Working Paper Series 2012-07, Institute for Social and Economic Research.
  14. 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.
  15. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, March.
  16. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  17. 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.
  18. Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," American Economic Review, American Economic Association, vol. 100(2), pages 327-32, May.
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