CROSS-SECTIONAL EFFICIENCY AND LABOR HOARDING IN A MATCHING MODEL OF UNEMPLOYMENT

We study positive and normative aspects of steady-state equilibrium in a market where firms of endogenous size experience idiosyncratic shoc ks and undergo a costly search process to hire their workers. The styl ized model we propose highlights interactions between job-security pro visions and sectoral shocks in determining the natural rate of unemplo yment, the allocation of labour, and the extent of labour hoarding, an d rationalizes cross-sectional asymmetries of gross employment flows a t the firm level. In our model, where productivity and search costs ar e dynamically heterogeneous across firms, decentralized wage bargains imply important cross-sectional inefficiencies, which overshadow the s tatic search inefficiencies on which simpler models focus.