How Labor Market Frictions Matter for Financial Decision Making

Human beings do not act in isolation. This particularly holds for economic systems in which workers are employed at firms. In one of the seminal papers in economics, Coase (1937) identifies transaction costs to be the prime economic reason why firms are formed to organize production, and, consequently, transaction costs also explain why workers are employed at firms. At first glance, this appears to be a subtle detail on the organization of economic activity. It has, however, a huge impact on individuals, as this subtle detail also is the reason why the provision of their workforce in the economy is performed through employment at firms.