Coordination, matching, and wages

We analyse the coordination problem in the labour market by endogenizing the matching function and the wage share. Each firm posts a wage to maximize the expected profit, anticipating how the wage affects the expected number of applicants. In equilibrium workers apply to firms with mixed strategies, which generate coordination failure and persistent unemployment. We show how the wage share, unemployment, and the welfare loss from the coordination failure depend on the market tightness and the market size. The welfare loss from the coordination failure is as high as 7.5 per cent of potential output.