Labour flows in a simulation model of the firm

A hierarchical model is calibrated and used to illustrate labour market flows within a firm. The model establishes a link between the models of the firm from the literature on industrial organisation and the description of labour market dynamics in the flow approach to labour markets. It describes the decision of the personnel management of the firm whether to fire workers, and/or whether to hire workers from the internal or external labour market. The decision is based on firing costs, hiring costs, training costs and the availability of qualified workers within and outside the firm. The firm tries to adjust the size and composition of its personnel as much as possible to the optimal size and hierarchical structure which follows from maximisation of the net revenues in each period. Data in this maximisation process of the firm are productivity, wage differentials, economies of scale from cooperation, foregone production due to supervising and training, and average hiring and firing costs. Yet, usually immediate adjustment to the optimal composition of the personnel is not possible due to unanticipated quits and due to lack of qualified workers. In that case vacancies may remain open for a prolonged time. The parameters of the model are calibrated in order to mimic a representative firm of average size, which has external and internal labour flows in accordance with data found in the (scanty) empirical literature. Heterogeneity amongst firms is introduced by means of changes in the major parameters which dictate the hierarchical structure and optimal size of the firm.