Working Papers

Labor Market Friction, Firm Heterogeneity, and Aggregate Employment and Productivity (with R. Lentz) Friction.pdf

Abstract: The paper is based on a synthesis of a \product variety" version of the .rm life cycle model developed by Klette and Kortum (2004) and an equilibrium search model of the labor marketwith job to job flows introduced by Mortensen (2003). In the construction, a continuum of intermediate product and service varieties are produced with labor that serve as inputs in the production of a .nal good. Intermediate goods producers generally di.er with respect to their productivity. New .firms enter and continuing .firms grow by developing new product varieties. The time required to match workers and jobs in the model depends on the total search eff.ort of workers and the total number of vacancies. Workers can search both while employed and unemployed. Wages are set continuously as the outcome of a bargaining problem over current output. A job separation occurs if either a worker quits or a job is destroyed. We show that a general equilibrium solution to the model exists and that the equilibrium is broadly consistent with observed dispersion in .rm productivity, wages, and the relationship between them as well as patterns of worker flows. The model implies that frictions, both in the labor market and in the .rm growth process, can be important determinants of aggregate productivity as well as aggregate employment.

Wage and Productivity Dispersion: Labor Quality or Rent Sharing? (with J.Bagger and B.J. Christensen) View

Abstract: Wage and labor productivity differ across firms, and the more productive tend to pay higher wages. We consider a model that allows for differences in capital, employment and labor quality as well as rent sharing, all of which should help explain these observations. We estimate the model using detailed matched employer-employee data from the manufacturing sector in Denmark. The production function estimation is embedded in a structural equation system involving worker, firm, time, and occupation effects from an individual wage decomposition and accounting for labor input components that are substitutes and complements, while accommodating stochastically varying factor productivity. We find that both input heterogeneity and intrinsic differences in total factor productivity across firms are important explanations. In the case of manufacturing, about 41% of the dispersion in log value added per worker is attributable stems from intrinsic TFP differences. Only 5% is associated with quality differences in the labor input. In the case of individual log wages, 70% of the variation is due to individual characteristics, whereas only 13% is attributable to firm differences. Our results suggest that there are major gains to reallocation of labor from less to more productive firms. Rent sharing enhances the reallocation process by inducing wage dispersion that motivates worker search. The relatively small contribution of firm heterogeneity to individual wage dispersion is thus consistent with the ineffcient allocation of labor across firms.

to cross- firm differences in the levels of capital per worker, while another 39% of the variation.

Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment

Abstract: A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model.
Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.