An equilibrium search model with optimal wage-experience contracts

The objective of this paper is to study equilibrium in a labour market, in which workers search on the job and firms offer wage contracts conditional upon workers' experience and employment status. In this environment, the optimal contract can be described by a promotion contract. The distribution of contract offers is dispersed within and across experience levels. As workers stay longer in the market and promotion dates get closer, the option value of holding a job increases. Firms offer early promotions to attract more experienced workers. A positive relation between experience and earnings can arise purely from firms' optimal response to labour market competition brought about by workers' on-the-job search. We characterise the offer distribution for each experience level and show how these change with labour market conditions.     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

DIRECTED SEARCH ON THE JOB AND THE WAGE LADDER*

We model a labor market where employed workers search on the job and firms direct workers' search using wage offers and employment probabilities. Applicants observe all offers and face a trade‐off between wage and employment probability. There is wage dispersion among workers, even though all workers and jobs are homogeneous. Equilibrium wages form a ladder, as workers optimally choose to climb the ladder one rung at a time. This is because low‐wage applicants are relatively more sensitive to employment probability than to wage and thus forgo the opportunity to apply for a high wage, with a lower chance of success.     

TRAINING,TURNOVER, AND SEARCH*

This article explores a model of firm‐specific training in a job search environment with labor turnover. The main substantive finding is a positive association between training and wages (when dispersed). The article then precisely characterizes how both wage dispersion and firm profitability depend on the flow value b≥ 0 of workers' unmatched time. It is shown that: (i) for all high values b, no equilibrium exists; (ii) for intermediate values b, multiple equilibria arise, where firms earn zero profits, and choose from a general wage distribution; (iii) for all lower values b, there is a unique equilibrium, with firms earning positive profits, and choosing from an atomless set of wages.     

Job Security,Financial Security and Worker Well‐being: New Evidence on the Effects of Flexible Employment

This paper uses panel data drawn from the Household, Income and Labour Dynamics in Australia (HILDA) survey to provide new evidence of the links between unemployment, wages, job security, financial security and workers' well‐being for workers in flexible employment. Our findings indicate that workers in flexible employment encounter more unemployment and experience increased job insecurity; unemployment is associated with wage penalties. Lower wages, job insecurity and financial insecurity affect well‐being. However, these negative outcomes are mitigated by longer job tenure. Our results have implications for moves towards a flexicurity model of employment     

Public Employment and the Business Cycle*

We add a public employment sector to the basic search and matching model in order to study the business cycle impact of public wage and employment policies. The government is assumed to follow exogenous rules for public wages and employment calibrated to match some cyclical features of US policies. These features include a positive public wage premium and mildly procyclical public wages and employment. We find that the presence of the public sector increases the volatility of employment and output.     

Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level*

To what extent do firms insulate their workers' wages from fluctuations in product markets? Which firm and worker attributes are associated with wage flexibility at the micro level? We first rely on Guiso, Pistaferri and Schivardi (2005) to estimate dynamic models of sales and wages, finding that in Portugal, workers' wages respond to permanent shocks on firm performance, as opposed to transitory shocks. We then explore the factors associated with wage flexibility, finding that collective bargaining and minimum wages are associated with higher wage insurance by the firm, while the threat of firm bankruptcy reduces it. Managers receive less protection against permanent shocks than other workers.     

Capital tax,minimum wage,and labor market outcomes

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output.     

Realitic and Analytic Syntheses of Macro- and Microeconomics

We study the impact of employer's opportunism on wage rigidity in capitalist companies by arguing that the need to fix wages is crucially influenced by the asymmetric distribution of decision-making power and information in favor of the stronger contractual party — the employer, and against the weaker contractual party — employees. The capitalist entrepreneur can make decisions, whose negative consequences are borne by workers in terms of lower wages and more intense work pace. Excessive wage reductions in the face of negative exogenous shocks or too risky investment decisions represent the main instances of such opportunistic behavior. Fixed wages can represent workers' best response to the emerging risk of the employer moral hazard, but this implies a heightened risk of layoffs since wages and employment levels cannot be fixed at the same time. Besides discussing piece rate contracts, profit-sharing and codetermination as counterexamples, we observe worker cooperatives which depart from the presence of contrasting interests and private information in the principal-agent framework. Indeed, several empirical studies have shown greater employment stability and wage flexibility in worker cooperatives vis-à-vis the capitalist firm.     

Wage Posting in Two-Sided Search and the Minimum Wage

This article focuses on wage formation in an equilibrium (two-sided) model of search with match-specific heterogeneity. Despite a large number (a continuum) of employers, search provides sufficient isolation to generate market power. By posting wages, employers, without collusion, capture most of the surplus that accrues to any match. The equilibrium wage is below that which maximizes employment. An example, using calibrated parameter values, is used to reconcile some recent, otherwise contradictory empirical results on the employment effects of minimum wage adjustments.     

Wage differentials, discrimination and efficiency

I analyze a large labor market where homogeneous firms post wages to direct the search of workers who differ in productivity. I show that the model has a unique equilibrium. The wage differential depends positively on the workers’ productivity differential only when the latter is large. When the productivity differential is small, high-productivity workers get a lower wage than low-productivity workers. This reverse wage differential remains even when the productivity differential shrinks to zero. However, the equilibrium is socially efficient. High-productivity workers always get the employment priority and higher expected wages than low-productivity workers. Although discrimination in terms of expected wages does not exist, conventional measures are likely to incorrectly find discrimination in the model.     

Human capital,reservation wages and job competition: Heckman's lambda re-interpreted

This study integrates insights from three theories into a single model explaining the simultaneous distribution of employment and wages. Human capital theory is taken as the general framework, whereas search theory and the more recent ‘crowding’ or ‘job competition’ hypothesis are used to explain selectivity in employment and the resulting bias in wage regressions. An empirical test on Belgian data, using a two-stage probit-OLS model, indicates that the crowding theory dominates the search hypothesis for men. For women, it seems to be outweighed by relatively higher reservation wages, probably due to women's different behaviour with respect to family responsibilities.     

Marriage and employment participation with wage bargaining in search equilibrium

We build an equilibrium search model where married couples make joint decisions on home production and labour market participation and analyse the implications of our results for a frictional marriage market. A worker's bargaining position reflects their productivity, and the productivity and employment status of their spouse. People sometimes accept transitory jobs only to raise the spouse's long-term wages. Firms sometimes reduce turnover by unilaterally increasing a worker's wage, ensuring that the spouse stays at home.     

Credit,vacancies and unemployment fluctuations

Propagation in equilibrium models of search unemployment is altered when vacancy costs require some external financing on frictional credit markets. The easing of financing constraints during an expansion as firms accumulate net worth reduces the opportunity cost for resources allocated to job creation. The dynamics of market tightness are affected by (i) a cost channel, increasing the incentive to recruit for a given benefit from a new hire, and (ii) a wage channel, whereby firms' improved bargaining position limits the upward pressure of market tightness on wages. Agency related credit frictions endogenously generate persistence in the dynamics of labor-market tightness, and have a moderate endogenous effect on amplification.     

Worker Absenteeism in Search Equilibrium*

In this paper we introduce a general equilibrium model of search unemployment that incorporates absence from work as a distinct labor force state. Absenteeism is driven by random shocks to the value of leisure that are private information to the workers. Firms maximize profits while recognizing that the compensation package may affect the queue of job applicants and the absence rate. The analysis provides results concerning the effects of social insurance benefits and other determinants of workers' and firms' behavior. The normative analysis identifies externalities associated with firm‐provided sick pay and examines the welfare implications of alternative policies.     

Job matching and the distribution of producer surplus

We study wage determination in the Jovanovic model of matching, relaxing the standard assumption that wages continuously adjust to reflect on-the-job performance and studying aggregation of ex-ante heterogeneous career paths. We assume that workers have no bargaining power and consider an equilibrium where individual workers' age-earnings profiles are piecewise constant, reflecting their outside earning opportunities at each point in time. Turnover results from employers' firing decisions rather than from workers' quitting decisions, and the equilibrium delivers realistic cross-sectional and time-series implications. Employees receive only a portion rather than the whole of the ex-ante producer's surplus from established matches, and have individual incentives to lobby for increased job security. Inefficiently low aggregate turnover may result if such lobbying efforts are successful.     

Skills scarcity and export intensity

We describe a model of trade with skills-based product differentiation and non-proportional trade costs that predicts a positive correlation between firms' export intensity, the price of their exports and the wages they pay to their workers. In equilibrium, firms that employ workers with comparatively scarcer skills export a larger proportion of their output, pay higher wages and charge higher prices. In line with empirical evidence, the model predicts that trade liberalization can cause the distribution of earnings to become more polarized, with patterns that reflect the heterogeneous effects of trade liberalization on firms' export performance.     

The heterogeneous regional effects of minimum wages in Poland

We evaluate the impact of large minimum wage hikes on employment and wage growth in Poland between 2004 and 2018. We estimate panel data models utilizing the considerable variation in wage levels, and in minimum wage bites, across 73 Polish NUTS 3 regions. We find that minimum wage hikes had a significant positive effect on wage growth and a significant negative effect on employment growth only in regions of Poland that were in the first tercile of the regional wage distribution in 2007. These effects were moderate in size, and appear to be more relevant for wages. Specifically, if the ratio of minimum wage to average wage had remained constant after 2007, by 2018, the average wages in these regions would have been 3.2% lower, while employment would have been 1.2% higher. In the remaining two-thirds of Polish regions, we find no significant effects of minimum wage hikes on average wages or on employment.     

Equilibrium Wage Dispersion,Firm Size,and Growth

This paper analyzes a model of equilibrium wage dynamics and wage dispersion across firms. It considers a labor market where firms set wages and workers use on-the-job search to look for better paid work. It analyzes a perfect equilibrium where each firm can change its wage paid at any time, and workers use optimal quit strategies. Firms trade off higher wages against a lower quit rate, and large firms (those with more employees) always pay higher wages than small firms. Non-steady-state dispersed price equilibria are also analyzed, which describe how wages vary as each firm and the industry as a whole grow over time. Journal of Economic Literature Classification Numbers: D43, J41.     

Central Wage Setting under Multiple Technological Equilibria: A Mechanism for Equilibrium Elimination

Instituting an initial round of centralized wage setting before an ultimate round of decentralized wage bargaining may actually raise employment. A general multi–equilibrium model is set up with strategic complementarities in the implementation of a new technology through aggregate demand spillovers. In this model, centralized wage setting to establish an outside option wage, which is selectively binding on lo–tech firms, may achieve the "big push" to a hi–tech general equilibrium with higher employment, output, wages and profits.