Abstract
We propose a dynamic model of decentralized many-to-one matching in the context of a competitive labor market. Through wage offers and wage demands, firms compete over workers and workers compete over jobs. Firms make hire-and-fire decisions dependent on the wages of their own workers and on the alternative workers available on the job market. Workers bargain for better jobs; either individually or collectively as unions, adjusting wage demands upward/downward depending on whether they are currently employed/unemployed. We show that such a process is absorbed into the core with probability one in finite time. Moreover, within the core, allocations are selected that are characterized by surplus splitting according to a bargaining solution such that (i) firms and workforce share total revenue according to relative bargaining strengths, and (ii) workers receive equal workforce shares above their individual outside options. These results bridge empirical evidence and provide a rich set of testable predictions.
Highlights
We study a dynamic labor market matching model where many firms compete over many workers repeatedly over time
The principal motivation for this paper is to formulate a dynamic model of hire-and-fire in a decentralized labor market setting
Provide general convergence results for assignment games that hold for almost any “realistic” kind of dynamic, this present paper builds on these results in formulating a model that bridges from the experimental literature on bargaining (e.g., [1,2]) to the empirical literature on labor markets (e.g., [3,4])
Summary
We study a dynamic labor market matching model where many firms compete over many workers repeatedly over time. The dynamics are driven by the following three adjustments that may occur at any given time: Hire and fire Firms hire new workers if, in light of relevant wage payments, this promises higher profits. The principal motivation for this paper is to formulate a dynamic model of hire-and-fire in a decentralized labor market setting. Within the core, outcomes are selected that are characterized by a “weighted firm-workforce Nash bargaining solution”. These results provide a rich set of testable predictions; for example, homogeneity in wages leads to higher average wages.
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