Matching, Bargaining, and Wage Setting in an Evolutionary Model of Labor Market and Output Dynamics

In this paper, we present an agent-based, evolutionary, model of outputand labormarket dynamics. Firms produce a homogeneous, perishable good under constant returns to scale using labor only. Labor productivities are firm-specific and change stochastically due to technical progress. The key feature of the model resides in an explicit microfoundation of the processes of: (i) matching between firms and workers, (ii) job search, (iii) wage setting, (iv) endogenous formation of aggregate demand, and (v) endogenous price formation. Moreover, we allow for a competitive process entailing selection of firms on the basis of their revealed competitiveness. Simulations show that the model is able to robustly reproduce Beveridge, Wage and Okun curves under quite broad behavioral and institutional settings. The system generates endogenously an Okun coefficient greater than one even if individual firms employ production functions exhibiting constant returns to labor. Monte Carlo simulations also indicate that statistically detectable shifts in Okun and Beveridge curves emerge as the result of changes in institutional, behavioral, and technological parameters. Finally, the model generates sharp predictions about how system parameters affect aggregate performance (i.e. average GDP growth) and its volatility.