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Efficient firm dynamics in a frictional labor market

  • Philipp Kircher

    (LSE and University of Edinburgh)

  • Leo Kaas

    (University of Konstanz)

We develop and analyze a labor search model in which heterogeneous firms operate under decreasing returns and compete for labor by publicly posting long-term contracts. Firms achieve faster growth by offering higher lifetime wages that attract more workers which allows to fill vacancies with higher probability, consistent with empirical regularities. The model also captures several other observations about firm size and job flows, and it generates a sluggish response of the labor market to aggregate shocks. In contrast to existing bargaining models, efficiency obtains on all margins of job creation and destruction, both with idiosyncratic and aggregate shocks. The planner solution allows a tractable characterization which is useful for computational applications.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 160.

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Date of creation: 2013
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Handle: RePEc:red:sed013:160
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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