An evolutionary model of industry dynamics and firms' institutional behavior with job search, bargaining and matching

This paper proposes an evolutionary model that captures the main dynamics of a world where heterogeneous firms and workers interact and co-evolve. Within a micro-meso perspective, the model focuses on the influence of firms' "institutional settings" on industry dynamics, formalizing these settings as firms' labor choices. Benefiting from insights offered by mainstream labor economics, we introduce the dynamic processes of job search, bargaining and matching in an evolutionary framework. The results of a computer simulation model show that in a stable environment there is an initial clear improvement in the average fitness of the population of incumbent firms, which then evolves around an evolutionary stationary threshold. The consideration of endogenous matching and bargaining processes in the labor market results in important frictions. Furthermore, the simulation results show an increasing wage inequality between the two types of workers considered in the model. We also consider the effect of both positive and negative demand shocks. The turbulence in the industry increases (decreases) after the negative (positive) demand shock. As expected, the negative demand shock causes a decrease in the number of vacancies and, consequently, the unemployment rates increase considerably. Following the positive demand shock, on the other hand, the firms slightly increase the number of vacancies, so the behavior in terms of unemployment rates is better than in the model without shocks.