Template-Type: ReDIF-Paper 1.0
Title: Horizontally Differentiated Labor Markets: An Exploration, Part 1
Author-Name: Martin Ruckes
Author-Email: 
Author-Name: Konrad Stahl
Author-Email: 
Classification-JEL: J21, J23, J62, L23
Keywords: Internal Labor Markets, Horizontal Differentiation of Labor

Abstract: 
A worker’s productivity is only imperfectly revealed when employed to perform a particular
 task: the match could be imperfect, and her productivity dependent on that of other
workers in the team she is working in. We embed both elements of informational imperfection
in combination, within a parsimonious parametric model that involves horizontally
differentiated skills, as well as firms varying in size and structure of tasks from specialized
to diversified. The typical worker’s productivity is revealed only via that of her team, the
firm. The team’s productivity can be improved upon by frictionless re-matching within the
internal labor market. Any misalignment between the distribution of skills and tasks can be
removed only by external labor market actions constrained by informational frictions.
There are two parts. In part 1, we analyze internal market equilibrium, but assume for
the external market that firms can realize their desired demand. In part 2, we realistically
consider labor supply in the external market as furnished by separations, and structured by
signals involving the typical worker’s employment history.
We demonstrate generic opposite effects involving internal and external market activities.
In the internal market, constrained efficient re-matching yields the average productivity
of firms to increase in size and diversity of structure. Beyond that, the cumulative
distributions of firms by productivity are stochastically dominant across firms by increasing
degree of diversification.
While with the satisfaction of desired demand in the external market the firms improve
in expected productivity, the strength of improvement decreases in firm size and diversity
of structure. Productivity gains via re-matching in the internal market may be overturned by
the losses due to imprecise matches of hires from the external market: The more internal rematching
leads to leftward skewness in the distribution of firms towards higher productivity,
the less informative is the specification of desired demand (and, as we show in part 2: in
the supply) in the external market.


Note: 
Length: 37
Creation-Date: 2025-04
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp679
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_679