The Labor Market as an Equilibrium Newsvendor Problem

I study hiring under uncertainty when firms can either hold permanent labor as a buffer or hire from a spot market after demand is realized. I build a model where the spot market is endogenously determined such that when one firm relies more on spot labor, it thickens the market that other firms use as well. Individual firms do not internalize that contribution, so the competitive equilibrium involves too much buffering. I evaluate the model in the market for registered nurses using the universe of daily time sheet records from skilled nursing facilities. The data support the model’s general equilibrium predictions. Markets with thicker agency markets have less rationing conditional on total nursing hours, and thicker agency markets have compressed upper tails of permanent staffing and higher overall hours in the lower part of the distribution. Estimating a facility-level newsvendor model with heterogeneous spot market frictions and rationing costs I find that the nursing labor market was more efficient post-COVID, there are substantial welfare gains from lower spot market frictions, and that the marginal external benefit for a firm that participates in the spot market instead of hiring an employee as buffer averages 7 percent of wages. This labor market underprovides flexibility because the value of availability is not fully priced.