By Melvyn Coles and Dale Mortensen
This paper identifies a data-consistent, equilibrium model of unemployment, wage dispersion, quit turnover and firm growth dynamics. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Workers optimally quit to firms paying a higher wage and so move effciently from less to more productive firms. Start-up firms are initially small and grow endogenously over time. Consistent with Gibrats law, individual firm growth rates depend on firm productivity but not on firm size. Aggregate unemployment evolves endogenously. Restrictions are identified so that the model is consistent with empirical wage distributions.
A very rich, yet relatively tractable model of firma and wage heterogeneity. I predict this model will become an invaluable tool in comparing labor market and firm creation policies across countries. This should help a lot in disentangling and understanding why some economies stagnate with low unemployment or grwo fast with high wage iniequality, for example.