Workers as Partners: a Theory of Responsible Firms in Labor Markets

TL;DR

This paper develops a theory showing that responsible firms valuing worker welfare create a wage-setting wedge, influencing wages and vacancies, especially in markets with weak outside options and low mobility.

Contribution

It introduces a novel model where responsible firms' welfare considerations affect labor market outcomes, including wages and firm behavior, extending existing labor market theories.

Findings

Responsible firms create a wage wedge similar to a hiring subsidy.

Wage premia are larger in slack, low-mobility markets.

Responsible firms can pay higher wages even with lower productivity.

Abstract

What happens when employers value worker welfare in frictional labor markets? We show this "responsibility" creates an endogenous wedge in the marginal labor cost -- akin to a hiring subsidy -- altering wage and vacancy incentives rather than only changing the surplus split. The wedge is strongest when outside options are weak and separations rare, implying larger wage premia in slack, low-mobility markets. In a wage-posting model with on-the-job search, responsible firms may occupy the high-wage segment even when less productive. In a DMP model, responsible firms commit to higher worker bargaining power, raising the value of unemployment and thereby wages at regular firms.