An evolutionary model of industry dynamics and firms’ institutional behavior with job search, bargaining and matching

By combining features from distinct theoretical approaches, namely the evolutionary and the job search, matching and bargaining literatures, we propose a model that captures the main dynamics of a world where heterogeneous firms and workers interact and co-evolve. Within a micro-meso framework, the model focuses on the influence of firms’ labour choices (“institutional settings”) on industry dynamics, taking into account the existence of employment adjustment costs. The consideration of endogenous matching and bargaining processes in the labour market results in significant frictions, such as the simultaneous coexistence of unfilled job vacancies and unemployment. In a setting where technological progress is not biased a stylized fact of industrialized world economies in the last few decades emerges, the increasing wage inequality. Additionally, turbulence in the industry increases after a negative demand shock. As expected, the negative demand shock causes a decrease in the number of vacancies and, consequently, unemployment rates increase considerably. Interestingly, and mimicking the recent experiences of countries such as US, Spain, Greece and Portugal, the rise in unemployment is matched by a rise in contractual wages. This outcome is explained by the lower ability of the firms to fill their posted vacancies, which results from friction in the interactions among agents.