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Stochastic Unemployment with Dynamic Monopsony

Melvyn Coles and Dale Mortensen

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: This paper considers an equilibrium labour market with on-the-job search where heterogeneous ?rms, both by productivity and size, post wages and choose optimal hiring strategies. There are aggregate and ?rm speci?c pro- ductivity shocks. Industry dynamics are rich. By comparing the market out- come to the competitive allocation, simple numerical examples establishes how dynamic monopsony generates excessive job-to-job turnover, excessive job destruction rates at low productivity ?rms and so generates "too high" unemployment. It explains why gross hire ?ows and gross separation ?ows may be large and volatile, yet yield an unemployment process which is highly persistent.

Date: 2015
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