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- Title
PRECAUTIONARY DEMAND FOR LABOUR AND FIRM SIZE.
- Authors
Kudoh, Noritaka; Sasaki, Masaru
- 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.
- Subjects
JOB creation; LABOR market; LABOR productivity; LABOR supply; FULL employment policies; NEW jobs tax credit; VACANCY chains; ECONOMIC development; ECONOMIC equilibrium
- Publication
Bulletin of Economic Research, 2010, Vol 62, Issue 2, p133
- ISSN
0307-3378
- Publication type
Article
- DOI
10.1111/j.1467-8586.2009.00314.x