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Firm Wages in a Frictional Labor Market

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  • Leena Rudanko

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.

Suggested Citation

  • Leena Rudanko, 2023. "Firm Wages in a Frictional Labor Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 517-550, January.
    • Handle: RePEc:aea:aejmac:v:15:y:2023:i:1:p:517-50
    DOI: 10.1257/mac.20200440
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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