PRECAUTIONARY DEMAND FOR LABOUR AND FIRM SIZE

Noritaka Kudoh and Masaru Sasaki ()

Bulletin of Economic Research, 2010, vol. 62, issue 2, 133-153

Abstract: This paper studies firms' job creation decisions in a labour market with search frictions. A simple labour market search model is developed in which a firm can search for a second employee while producing with a first worker, and this creates the equilibrium size distribution of firms. A firm expands employment even if the instantaneous payoff to a large firm is less than that of staying small – a firm has a precautionary motive to expand its size. In addition, this motive is enhanced by a greater market tightness. Because of this effect, firms’ decisions become interdependent – a firm creates a vacancy if it expects other firms to do the same, creating strategic complementarity among firms and thereby self‐fulfilling multiple equilibria. An increase in productivity can cause a qualitative change in labour market tightness and the rate of unemployment.

Date: 2010
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https://doi.org/10.1111/j.1467-8586.2009.00314.x

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