Working Paper

A Theory of Non-Coasean Labor Markets

Abstract: We develop a theory of labor markets in a monetary economy with four realistic features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Due to the non-Coasean nature of labor contracts, inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker’s wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the aggregate labor market response to a monetary shock based on the distribution of workers’ wage-to-productivity ratios. These statistics crucially depend on the incidence of inefficient job separations, which we show how to identify using readily available microdata on wage changes and worker flows between jobs.

Keywords: Continuous-time methods; Wage rigidity; Wage inequality; Monetary policy; Layoffs; Quits; Inefficient job separations; Variational inequalities; Commitment; Unemployment; Stopping times; Directed search; Inflation;

JEL Classification: D31; E12; E31;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Opportunity and Inclusive Growth Institute Working Papers

Publication Date: 2023-03-10

Number: 066