Cross-sectional efficiency and labour 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 shocks and undergo a costly search process to hire their workers. The stylized model we propose highlights interactions between job-security provisions and sectoral shocks in determining the natural rate of unemployment, the allocation of labour, and the extent of labour hoarding, and rationalizes cross-sectional asymmetries of gross employment flows at the firm level. In our model, where productivity and search costs are dynamically hetero-geneous across firms, decentralized wage bargains imply important cross-sectional inefficiencies, which overshadow the static search inefficiencies on which simpler models focus. 1