This article characterizes labor markets in which the heterogeneity of workers and firms results in thin markets and rents. Neoclassical marginal analysis and matching are blended into a computable general equilibrium model of trade in efficiency units of labor. Although workers' bargaining problems are interrelated, a simple wage contract generates wage flexibility and efficient matching in the model's equilibrium. Equilibrium wages are predicted to vary with the diversity of firms, the scarcity of skills, and the costliness of search. The model is applied to superstar markets, union bargaining in sports, interindustry wage differentials, and the relationship between pay and profit.

An efficient matching model of quits and layoffs is developed to account for several empirical regularities. Differences between quits and layoffs over the life and business cycles and across demographic groups are generated by differential rates of general productivity growth. The standard approach to quits and layoffs, based on wage rigidity, is shown to be incapable of accounting for many of the empirical regularities. Although a formal test rejects a structural prediction of the efficient turnover model, the specification does well in predicting both the level of and time-series variation in the fraction of separations labeled quits.

This paper answers the efficient-turnover literature's long silence regarding the quit-layoff distinction. Treating quits as worker-initiated separations and layoffs as firm-initiated separations, I establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade. The efficient-turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs. Structural implications of the model are tested on data from the PSID.

This paper answers the efficient-turnover literature's long silence regarding the quit-layoff distinction. Treating quits as worker-initiated separations and layoffs as firm-initiated separations, I establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade. The efficient-turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs. Structural implications of the model are tested on data from the PSID.

We investigate whether a market‐clearing model is consistent with industry employment and wage patterns related to the cyclical upgrading of labor. We demonstrate that Roy's (1951) market‐clearing model of self‐selection would account for cyclical upgrading if industries were characterized by positive selection. Wage comparisons of industry movers and stayers in panel data do reveal widespread positive selection. Also consistent with the Roy model, composition‐corrected industry wages are more cyclical in high‐wage cyclical industries. The Roy model does fail to explain predictable patterns in the wage changes of industry movers, so we consider several market‐clearing and queuing extensions.