Labor specialization as a source of market frictions

This paper investigates why labor specialization brings additional frictions to the labor market. The intuition is that labor specialized firms rely on complementarity and firm-specific human capital, assigning high value to the worker-employer match. Consistent with employees' importance, the findings show that specialized firms preserve their workforce: these firms labor hoard and increase wages during slow-downs. Additionally, when specialized firms unexpectedly face a labor supply shock | albeit managing to decrease the wages of the remaining co-workers, they become less productive. Overall, the empirical evidence suggests that frictions introduce bilateral monopoly rents.