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Labour flows in a simulation model of the firm

Author

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  • Butter, F.A.G. den

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Gameren, E. van

Abstract

A hierarchical model is calibrated and used to illustrate labour market flows within a firm. The model establishes a link between the models of the firm from the literature on industrial organisation and the description of labour market dynamics in the flow approach to labour markets. It describes the decision of the personnel management of the firm whether to fire workers, and/or whether to hire workers from the internal or external labour market. The decision is based on firing costs, hiring costs, training costs and the availability of qualified workers within and outside the firm. The firm tries to adjust the size and composition of its personnel as much as possible to the optimal size and hierarchical structure which follows from maximisation of the net revenues in each period. Data in this maximisation process of the firm are productivity, wage differentials, economies of scale from cooperation, foregone production due to supervising and training, and average hiring and firing costs. Yet, usually immediate adjustment to the optimal composition of the personnel is not possible due to unanticipated quits and due to lack of qualified workers. In that case vacancies may remain open for a prolonged time. The parameters of the model are calibrated in order to mimic a representative firm of average size, which has external and internal labour flows in accordance with data found in the (scanty) empirical literature. Heterogeneity amongst firms is introduced by means of changes in the major parameters which dictate the hierarchical structure and optimal size of the firm.

Suggested Citation

  • Butter, F.A.G. den & Gameren, E. van, 1998. "Labour flows in a simulation model of the firm," Serie Research Memoranda 0034, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  • Handle: RePEc:vua:wpaper:1998-34
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    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector," Journal of Labor Economics, University of Chicago Press, vol. 7(1), pages 48-71, January.
    3. Daniel S. Hamermesh & Wolter H. J. Hassink & Jan C. Van Ours, 1996. "Job Turnover and Labor Turnover: A taxinomy of Employment Dynamics," Annals of Economics and Statistics, GENES, issue 41-42, pages 21-40.
    4. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1993. "Hierarchies and compensation: A case study," European Economic Review, Elsevier, vol. 37(2-3), pages 366-378, April.
    5. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
    6. Calvo, Guillermo A & Wellisz, Stanislaw, 1978. "Supervision, Loss of Control, and the Optimum Size of the Firm," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 943-952, October.
    7. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    8. Joseph G. Altonji & Robert A. Shakotko, 1987. "Do Wages Rise with Job Seniority?," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 437-459.
    9. Bhattacharya, Sudipto & Guasch, J Luis, 1988. "Heterogeneity, Tournaments, and Hierarchies," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 867-881, August.
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    More about this item

    Keywords

    hierarchical structure of a firm; internal labour market; hiring and firing costs; job mobility; costs and benefits of training firing costs; job mobility; costs and benefits of training;

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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