LABOR MARKET EQUILIBRIUM WITH REHIRING

Consistent with the empirical evidence, this article analyzes a labor market in which separations are not permanent and reactivated firms prefer to rehire former employees instead of seek new ones. Workers engage in job search due to the uncertain prospects of rehiring. If firms can commit to wages contingent on rehiring, they backload wages to provide incentives for workers to reduce their unobservable search effort. Under risk aversion and incomplete markets, if productivity at reactivation is sufficiently high, the tension between wage backloading and consumption smoothing leads to excessive search in equilibrium.     

Wage and Technology Dispersion

This paper explains why firms with identical opportunities may use different technologies and offer different wages. Our key assumption is that workers must engage in costly search in order to gather information about jobs (Stigler (1961)). In equilibrium, some firms adopt high fixed cost, high productivity technologies, offer high wages, and fill job openings quickly. Other firms adopt less capital-intensive technologies and offer low wages, hiring mostly uninformed workers. In equilibrium, the amount of wage dispersion leaves workers indifferent about whether to gather information, and the fraction of informed workers leaves firms indifferent about their wage and technology choice. We show that worker search, which would appear to be a rent-seeking activity in partial equilibrium, may be efficiency-enhancing in general equilibrium.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Corporate Tournaments, Human Capital Acquisition, and the Firm Size–Wage Relation

This paper provides a possible explanation for the empirically observed size–wage effect and inter-industry wage differences. It develops a model in which incentives for workers to accumulate general human capital are provided by corporate tournaments, where workers with the highest level of general human capital win promotions. Given that the prizes in such tournaments are determined by outside market conditions, the investment and the equilibrium wages depend on firm and industry characteristics. The model implies that workers in bigger firms and in more technology intensive and profitable firms and industries acquire more human capital and receive higher wages and benefits.     

Efficient risk sharing,non-marketable labor income and fixed-wage contracts

This paper seeks to explain fixed-wage labor contracts. The traditional rationale that fixed wages represent an implicit sale of ‘wage insurance’ by risk-neutral firms to risk-averse workers is rejected as being incompatible with the fact that firms are owned by risk-averse investors. Instead, it is shown that fixed-wage contracts might arise from the non-marketability of labor income. When human capital is not marketable, it becomes optimal to shift all the risk in production onto the firm, since trading in equity markets enables efficient allocation of the uncertainty. The fixed-wage contract shifts the risk to equity owners and in fact replicates the first-best equilibrium that would emerge if individuals were paid their realized marginal product and allowed to trade shares in human capital.     

Promotion tournaments in market equilibrium

This paper studies how promotion tournaments motivate workers to accumulate human capital when wages are constrained by outside labor markets. Patient firms can retain some control over tournament prizes through a relational contract, but if the firms are competitive, full efficiency does not obtain in equilibrium even for discount factors arbitrarily close to one. Full efficiency, however, may be feasible in firms with superior technologies; thus, technological efficiency breeds incentive efficiency. The paper also shows that a wage floor leads to insufficient human capital investment in competitive firms, but could lead to excessive investment in technologically superior firms.     

Labor Market Institutions, Wages, and Investment: Review and Implications

Labor market institutions, via their effect on the wage structure,affect the investment decisions of firms in labor markets withfrictions. This observation helps explain rising wage inequalityin the US, but a relatively stable wage structure in Europein the 1980s. These different trends are the result of differentinvestment decisions by firms for the jobs typically held byless skilled workers. Firms in Europe have more incentives toinvest in less skilled workers, because minimum wages or unioncontracts mandate that relatively high wages have to be paidto these workers. I report some empirical evidence for investmentsin training and physical capital across the Atlantic, whichis roughly in line with this theoretical reasoning. (JEL E22,E24, J23, J24, J31)     

Holdups and Efficiency with Search Frictions

A natural holdup problem arises in a market with search frictions: Firms have to make a range of investments before finding their employees, and larger investments translate into higher wages. In particular, when wages are determined by ex post bargaining, the equilibrium is always inefficient: Recognizing that capital-intensive production relations have to pay higher wages, firms reduce their investments. This can only be prevented by removing all the bargaining power from the workers, but this, in turn, depresses wages below their social product and creates excessive entry of firms. In contrast to this benchmark, we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers. This efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers. We show that the underlying reason for efficiency is not wage posting per se, but the ability of workers to direct their search toward more capital-intensive jobs.     

Wage posting without full commitment

Wage posting models of job search typically assume that firms can commit to paying workers exactly the posted wage. We relax this assumption and impose “downward” commitment; firms can commit only to paying at least their advertised wage. As each firm can only commit to pay at least their advertised wage, workers may demand that the firm pay more than the advertised wage. In labor markets with a finite number of workers and firms, the strategic interaction between firms makes it costly for firms to provide applicants the incentive not to demand wages in excess of the advertised wage. In equilibrium, firms may settle for running job auctions at the cost of losing control of the number of applicants that they can attract. When this strategic interaction between firms vanishes, workers never choose to demand more than the advertised wage.     

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.     

Directed search with heterogeneous firms: an experimental study

Directed search models labor markets where workers observe wages before deciding where they will apply. This paper tests this model for the case of heterogeneous firms in a laboratory experiment. The theory predicts that more productive firms offer higher wages and workers apply more often to these higher wages. In consequence, more productive firms are more likely to match and the market is more efficient than the prediction of an alternative model where search is random. The main results of the experiment are that average firms offer wages that are close to or a little lower than the theoretical predictions but highly variable and workers apply more often to high offers but not to the extent predicted. The markets are no more efficient than random search predicts, because of the variation in wage offers.     

The Role of Expectation on Job Search and the Firm Size Effect on Wages

We formulate dynamic games which give a rationale to the firm size–wage effect that the sheer firm size increases wages. We postulate that past wages of large firms are known to new employees, while those of small firms are not. Large firms can credibly induce workers to expect high future wages and reduce turnover, while small firms have no choice but to be myopic and pay low wages. The equilibrium wage differential obtains under the same worker characteristics and production function. We provide empirical evidence that workers' expectations depend on firm size and affect wages as predicted by our model.     

RESIDUAL WAGE DISPERSION WITH EFFICIENCY WAGES

This article extends a classic on‐the‐job search model of homogeneous workers and firms by introducing a shirking problem. Workers choose their effort levels and search on the job. Firms elicit effort through wages and monitoring; an inverse relationship between wages and monitoring rates is derived. Wages play a dual role by allocating labor supply and motivating employee effort. This gives rise to an equilibrium wage distribution that contrasts with existing literature. In particular, I show that a hump‐shaped and positively skewed wage distribution, as observed empirically, can be derived even when firms and workers are, respectively, identical.     

Directed search with multi-vacancy firms

I construct a directed search model in which firms decide whether to enter a market and how many positions to create. Within this framework, the number of firms and the size of each firm are determined endogenously, wages play an allocative role in the matching process, and the frictions inherent in this process derive from the equilibrium behavior of workers and firms. I characterize the (unique) equilibrium. Comparative statics generate testable implications for cross-sectional variation in matching efficiency, as well as the dynamic behavior of vacancies and unemployment. Moreover, allowing for ex-ante heterogeneity across firms, the model can easily and naturally generate the observed relationship between firm size, wages, profitability, and hiring.     

CONTRACTING OUT,PUBLIC POLICY AND ENTREPRENEURSHIP

Relatively little is known about the impact of public policies on the decisions of firms to contract out parts of their production, despite widespread growth in this practice. The present paper uses a simple principal‐agent model to explore the effects of various public policies which affect employers' incentives to outsource by re‐grading their employees as independent self‐employed contractors. Minimum wages are predicted to increase contracting out, as are payroll and income taxes under several plausible conditions, including worker preferences exhibiting constant relative risk aversion.     

Skills,Tasks and the Scarcity of Talent in a Global Economy

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.     

COMPETITIVE SEARCH,EFFICIENCY, AND MULTIWORKER FIRMS*

I study competitive search equilibrium in an environment where firms operate a decreasing‐returns production technology and hire multiple workers simultaneously. Firms post wages, possibly several of them. The equilibrium can feature wage dispersion even though all firms and workers are ex ante identical. Unlike the benchmark where firms hire a single worker, hiring is constrained inefficient. Efficiency requires that firms commit to the number of hires, pay all applicants, or pay wages that depend on the number of applicants. Under wage‐posting, the inefficiency is highest at intermediate levels of labor market tightness.     

Spillovers of Equal Treatment in Wage Offers

We analyse a labour‐matching model with wage posting, where – reflecting institutional constraints – firms cannot differentiate their wage offers within certain subsets of workers. Inter alia, we find that the presence of impersonal wage offers leads to wage compression, which propagates to the wages for high productivity workers who receive personalized offers.     

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.