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  3. American Economic Journal: Macroeconomics
  4. January 2023
  5. Firm Wages in a Frictional Labor Market

Firm Wages in a Frictional Labor Market

  • Leena Rudanko
American Economic Journal: Macroeconomics
vol. 15, no. 1, January 2023
(pp. 517-50)
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Abstract

This paper studies wage setting in a directed search model of multiworker firms facing within-firm equity constraints on wages. The constraints reduce wages, as firms exploit their monopsony power over their existing workers, rendering wages less responsive to productivity in doing so. They also give rise to a time inconsistency in the dynamic firm problem, as firms face a less elastic labor supply in the short run than in the long run, making commitment to future wages valuable. Constrained firms find it profitable to fix wages, and doing so is good for worker welfare and resource allocation in equilibrium.

Citation

Rudanko, Leena. 2023. "Firm Wages in a Frictional Labor Market." American Economic Journal: Macroeconomics, 15 (1): 517-50. DOI: 10.1257/mac.20200440

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 Business Fluctuations; Cycles
  • J31 Wage Level and Structure; Wage Differentials
  • J42 Monopsony; Segmented Labor Markets
  • J63 Labor Turnover; Vacancies; Layoffs
  • J64 Unemployment: Models, Duration, Incidence, and Job Search
  • M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
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