We theoretically study misallocation of labor in a heterogeneous-firm model with im-
perfectly directed search. Some workers can direct their search, while others are un-
informed about the location of wage offers ex ante and are assigned to job open-
ings randomly. The main result is that too many workers apply to high-productivity
firms, relative to the social optimum. This occurs because too many firms take ad-
vantage of their market power, attracting only random searchers. Because it is the
low-productivity firms that do so, this induces all the directed searchers to concentrate
at the high-productivity firms. Improvements in information have ambiguous effects
on worker allocation, wages, and worker utility. A minimum wage can increase em-
ployment and welfare by reallocating workers across firms. With an endogenous entry
choice, policy design meets with a tradeoff in balancing the misallocation inefficiency
and a standard entry externality. |
