Abstract
We develop a model in which competition in the labor market may produce worker…rm matches that are inferior to those obtained in the absence of competition. This result contrasts with the conventional wisdom that competition among employers allocates scarce talent e¢ ciently. In a model in which employers asymmetrically learn about the ability of their workers, we show that constraining labor market competition may be socially desirable precisely because it leads to better talent allocation. The model provides a cautionary counterpoint to one of the most popular arguments against the regulation of pay, i.e., the argument that price-distorting regulation leads to ine¢ cient matches of workers and …rms.
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