Market Power And Efficiency In A Search Model

The authors build a theoretical model to study the welfare effects and resulting policy implications of firms' market power in a frictional labor market. The environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. They find that the decentralized equilibrium is inefficient and that the firms' market power results in the misallocation of workers from the high-to the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies.