This paper investigates why labor specialization brings additional frictions to the labor market. The intuition is that labor specialized firms rely on complementarity and firm-specific human capital, assigning high value to the worker-employer match. Consistent with employees' importance, the findings show that specialized firms preserve their workforce: these firms labor hoard and increase wages during slow-downs. Additionally, when specialized firms unexpectedly face a labor supply shock - albeit managing to decrease the wages of the remaining co-workers, they become less productive. Overall, the empirical evidence suggests that frictions introduce bilateral monopoly rents.

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30 October 2018     Paper Number CEPDP1580

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This CEP discussion paper is published under the centre's Labour programme.