Equilibrium labour turnover, firm growth and unemployment

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.

One Response to Equilibrium labour turnover, firm growth and unemployment

  1. M. H. says:

    I find the topic of this paper very interesting, but it is very difficult to read. It took me several reads to understand the matching process, which is essentially random meeting with workers accepting job offers according to their reservation wage. That makes all sense except for the random meeting part. Labor markets are highly segregated, and using directed search would have made much more sense.

    This is important, because it should have an important impact on wage dispersion. With directed search, fewer chance meetings happen with no chance of matching successfully. This influences wage offers and reservation wages.

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