Firm Wages in a Frictional Labor Market

Leena Rudanko

No 19-5, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper studies a labor market with directed search, where multi-worker firms follow a firm wage policy: They pay equally productive workers the same. The policy reduces wages, due to the influence of firms? existing workers on their wage setting problem, increasing the profitability of hiring. It also introduces a time-inconsistency into the dynamic firm problem, because firms face a less elastic labor supply in the short run. To consider outcomes when firms reoptimize each period, I study Markov perfect equilibria, proposing a tractable solution approach based on standard Euler equations. In two applications, I first show that firm wages dampen wage variation over the business cycle, amplifying that in unemployment, with quantitatively significant effects. Second, I show that firm wage firms may find it profitable to fix wages for a period of time, and that an equilibrium with fixed wages can be good for worker welfare, despite added volatility in the labor market.

Keywords: Labor Market Search; Business Cycles; Wage Rigidity; Competitive Search; Limited Commitment (search for similar items in EconPapers)
JEL-codes: E24 E32 J41 J64 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2019-01-22
New Economics Papers: this item is included in nep-bec, nep-dge, nep-lma and nep-mac
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Related works:
Journal Article: Firm Wages in a Frictional Labor Market (2023)
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DOI: 10.21799/frbp.wp.2019.05

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