The quality effect of intra‐firm bargaining with endogenous worker flows

• Author: Tristan‐Pierre Maury,Fabien Tripier
• Published date: 01 June 2019
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/ijet.12164

doi: 10.1111/ijet.12164

The quality effect of intra-firm bargaining with endogenous

worker flows

Tristan-Pierre Maury∗and Fabien Tripier†

The performance of the labor market depends not only on the quantity of jobs in the economy,

but also on the quality of jobs. This paper proposes a new theoretical explanation of the job

quality issue in search and matching models. Wedevelop a matching and intra-firm bargaining

model in which large firms hire workers and decide to destroy low-productivity job–worker

matches. The sources of inefficiency include the well-known quantitative effect of intra-firm

bargaining, namely, the excessive size ofthe fir ms concerned; and a new quality effect, namely,

the poor quality of the job–worker matches selected by firms.

Key wor ds matching, intra-firm bargaining, worker flow

JEL classification J3, J6

Accepted 22 August2017

1 Introduction

The quantity of jobs in the economy cannot completely characterize the performance of the labor

market. The quality of these jobs also matters because quality determines workers’ productivity and,

therefore, the overall welfare of the economy. If the market economy does not provide an efficient

quality of jobs, a job quality problem might arise that requires welfare-improving labor market

policies, even if the policies increase unemployment.1

The debate on the job quality issue began in the 1980s, when economists such as Bluestone and

Harrison (1988) warned about the rising number of low-quality jobs; see Goos and Manning (2007)

for a recent assessment of this view. Alongside empirical investigations, theoretical researchershave

focused on the ability of the market to provide an efficient quality of jobs. The seminal contributions

of Stevens (1994), Redding (1996) and Acemoglu (2001) showed that the quality of jobs is generally

non-optimal with labor market search frictions, because of market externalities.2The main con-

tribution of this paper is to provide a new explanation of the bias toward low-quality jobs that is

∗EDHEC Business School, Lille, France

†EPEE, Univ Evry, Universit´

e Paris-Saclay, Bˆ

atiment Ile de France, Evry Cedex, France & CEPII. Email:

fabien.tripier@univ-evry.fr

Wewould like to thank the anonymous referee, Giuseppe Bertola, Pierre Cahuc, WilliamHawkins, Philipp Kircher and the

participants in the inaugural conference of the EuropeanSearch and Matching (SaM) network at the University of Bristol.

Fabien Tripieracknowledges support from the Labex MME-DII (ANR-11-LBX-0023-01). The usual disclaimers apply.

1One example is the case for unemployment insurance in Acemoglu and Shimer (2000).

2Stevens (1994) considers externalities between firms in the provision of on-the-job training, whereas Redding (1996)

considers pecuniary externalities between investments in human capital (by workers) and in researchand development

(by firms). In Acemoglu (2001), pecuniary externalities are the result of a hold-up phenomenon associated with the

choice of capital by firms.

International Journal of Economic Theory xx (2018) 1–25 © IAET 1

International Journal of Economic Theory

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Quality effect of intra-firm bargaining Tristan-Pierre Maury and Fabien Tripier

based not on market externalities but rather on the intra-firm bargaining mechanism described by

Stole and Zwiebel (1996a,b).3Notice that the question of the quality of newly created jobs, which

is exogenous in our setup, is not addressed in the paper. We only deal with the destruction side of

the job quality issue: the way firms destroy low-quality jobs. Hence, the “quality” term mentioned

throughout the paper is mostly about the quality of selected jobs.

In this paper, the bias towardlow-quality jobs is the outcome of the strategic interactions w ithin

firms; that is, between the wage-bargaining process with workers and the selection of the quality

of job–worker matches by firms. This result is obtained by extending the matching and intra-firm

bargaining literature initiated by Smith (1999), Cahuc and Wasmer (2001) and Cahuc et al. (2008)

in the case of endogenous firing.4This extension is motivated by the importance of firing decisions

for the analysis of labor market fluctuations and cross-country differences. Cyclical variations in

unemployment are driven by the fluctuations in duration of unemployment spells (associated with

the job finding rate or the outflows from unemployment) and in the number of unemployed in the

economy (associated with the job separation rate or the inflows in unemployment). Small inflow

volatility would suggest modeling an acyclical and exogenous job separation rate to focus on the

fluctuations of the endogenous job finding rate, but evidence shows large cyclical variations in the

job separation rate (Fujita and Ramey 2009)5and points to the need to endogenize the firing decision

in business cycle models.6Modeling firing decisions is also essential for cross-country analysis:

international differences in the inflow rate are almost as important as international differences in

the outflow rate, as shown by Elsby et al. (2012). The strong positive relationship between these two

rates calls for a joint analysis of entry and exit from unemployment in labor market models where

both hiring and firing are endogenous, as done in this paper.

Because firing decisions endogenize the averagequalit y of the job–workermatches in firms, we can

identify a new qualitative effect of intra-firm bargaining in addition to the traditional quantitative

effect associated with the size of firms.7We show that intra-firm bargaining induces inefficient

hiring and firing rules in the economy. The individual wage solution of the intra-firm bargaining

process depends on two variables that are decided by the firm, namely,its quantity of matches and its

3Stole and Zwiebel(1996a,b) de velopa general setup to study the joint decisions on wages and on the organization of firms

and describe the inefficiencies induced by the strategic interactions between these decisions. Intra-firm bargaining refers

to these strategic interactions. One of Stole and Zwiebel’s key findings was that intra-firm bargaining causes firms to

over-employworkers to reduce their individual marginal productivities, thereby reducing the individual wage bargained

with each worker.

4Firing is exogenousin Smith (1999), Cahuc and Wasmer (2001), and Cahuc et al. (2008). Krause and Lubik (2007b) discuss

the business cycle implications of intra-firm bargaining in matching models with exogenous destruction. Matching and

intra-firm bargaining models have been extended to endogenous training by Tripier (2011) and to endogenous hours

worked by Kudohand Sasaki (2011), but these models still include exogenous job destruction. Matching and intra-firm

bargaining models using endogenous firms’ dynamics are presented and discussed below.

5Fujita and Ramey (2009) construct series of job finding and job separation rates for the US economy and conclude that

the last contributes to almost 40–50 percent of unemployment fluctuations.

6Thisconventional view has been challenged by Shimer (2005, 2012) and Hall (2005) who reported small inflow fluctuations

for the US economy and thereforeminored the role of the job separation rate in unemployment fluctuations. Most recent

evidence provided by Elsby et al. (2009) and Fujita and Ramey (2009) has restored this view. Yashiv (2007) and Elsby

et al. (2009) explain the origin of this controversy and discuss the data and methods used in the main papers involved.

Petrongolo and Pissarides (2008) compare Europeancountries and show that inflows play a more important role in UK

and Spain (after 1980) than in France. See also Smith (2011) for a study of the UK economy.

7Smith (1999), Cahuc and Wasmer(2001), and Cahuc et al. (2008) studied the effects of intra-firm bargaining on hiring in

the matching model and the conditions under which the strategic interaction between the firm’sdecision on job creation

and the wage-bargaining process leads a firm to post an excessive number of vacancies or, equivalently, to over-hire

workers.

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International Journal of Economic Theory 15 (2019) 183–207 © IAET

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