Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment.

The authors study positive and normative aspects of steady-state equilibrium in a market where firms of endogenous size experience idiosyncratic shocks and undergo a costly search process to hire workers. The model highlights interactions between job-security provisions and sectoral shocks in determining the natural rate of unemployment, the allocation of labor, and the extent of labor hoarding, and rationalizes cross-sectional asymmetries of gross employment flows at the firm level. In the authors' model, where productivity and search costs are dynamically heterogeneous across firms, decentralized wage bargains imply important cross-sectional inefficiencies, which shadow the static search inefficiencies. Copyright 1994 by The Review of Economic Studies Limited.