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.     

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.     

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.     

Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster “promotion” rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.     

RESIDUAL WAGE DISPARITY AND COORDINATION UNEMPLOYMENT*

How much of residual wage dispersion can be explained by an absence of coordination among firms? To answer, we construct a dynamic directed search model with identical workers where firms can create high‐ or low‐productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on‐the‐job search. The stationary equilibrium wage distribution is hump‐shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75–90% of those found empirically. However, the model underestimates the average duration of unemployment.     

DYNAMIC CONTRACTS WITH WORKER MOBILITY VIA DIRECTED ON‐THE‐JOB SEARCH

This article proposes a model with dynamic incentive contracts and on‐the‐job search in a frictional labor market. The optimal long‐term contract exhibits an increasing wage–tenure profile. With increasing wages, worker effort also increases with tenure. These two features imply that the probabilities of both voluntary and involuntary job separation decrease with both job tenure and the duration of employment. Given these results, workers experience differing labor market transitions—between employment, unemployment, and across different employers—and the equilibrium generates endogenous heterogeneity among ex ante homogeneous workers.     

Good News and Bad News: Search from Unknown Wage Offer Distributions

The largest market in national economies is the labor market. Labor market contracting is characterized by job search, often from unknown wage offer distributions. This paper reports experimental tests of finite horizon models of job search in which the wage offer distribution is unknown. Theoretically-optimal search from an unknown wage offer distribution can have the seemingly paradoxical property that some offers will be accepted that are lower than other offers that will be rejected in the same period of the search horizon. Thus the reservation wage property (or lowest acceptable wage path) may not exist. This can occur because an offer that is a priori relatively high (good news) can imply that it is highly probable that search is from a favorable distribution, and such an offer can look unattractive when it is an a posteriori relatively low offer from a favorable distribution (bad news). This paper reports results from experimental treatments for search from unknown distributions in which the reservation wage property does exist and treatments in which it does not exist. We find that the consistency of search behavior with search theory reported in earlier papers is robust to the presence or absence of the reservation wage property and to whether the draws come from known or unknown distributions.     

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.     

Search efficiency,wage dynamics and welfare

Advances in information technology have improved the job-search process in the labor market. We analyze the effects of this improvement by constructing a search-and-matching model with two sectors: a risky sector with firm-specific productivity shocks and a risk-free sector. The risky sector is characterized by a low level of commitment between employers and workers – either party can end the employment relationship. We show that a better job-search process generates more job matches in the risky sector, and this benefits workers by improving their outside options. The effect on employers is subtle: while it is easier to fill vacancies, workers become more expensive. At the same time, the ease of finding new workers makes it harder for employers to keep their wage promises to workers and increases wage volatility. Our paper contributes to the literature by offering a novel explanation for the observed rise in wage volatility.     

Does Employee Body Weight Affect Employers' Behavior?

In this paper, we study the possible segregation of overweight individuals already established in the labor market when firms make decisions on hiring, firing, and promoting. Most existing studies use wage equations to document wage differences, but little is known about the reason for the differences and the sorting of workers. Using an equilibrium search model, search frictions are taken into account. Additionally, sorting is examined using a logit model. We find that wage differences between workers who have a normal weight and workers who are overweight or obese can be explained by differential firm behavior, with respect to both the job‐offer arrival rate and the probability of being promoted.     

Monitoring Job Offer Decisions,Punishments, Exit to Work,and Job Quality

Unemployment insurance systems include the monitoring of unemployed workers and punitive sanctions if job search requirements are violated. We analyze the causal effect of sanctions on the ensuing job quality, notably on wages and occupational level. We use Swedish data and estimate duration models dealing with selection on unobservables. We also develop a theoretical job search model that monitors job offer rejection versus job search effort. The empirical results show that, after a sanction, the wage rate is lower and individuals move more often to a part‐time job and a lower occupational level, incurring human capital losses.     

Equilibrium Directed Search with Multiple Applications

We analyse a model of equilibrium directed search in a large labour market. Each worker, observing the wages posted at all vacancies, makes a fixed, finite number of applications, a . We allow for the possibility of ex post competition should more than one vacancy want to hire the same worker. For each a , there is a unique symmetric equilibrium in which all vacancies post the same wage. When a = 1, the common posted wage lies between the competitive and monopsony levels, and equilibrium is efficient. When a > 1, all vacancies post the monopsony wage. Some workers fail to find a job, some find a job at the monopsony wage, and some—those for whom there is competition—get the competitive wage. Equilibrium is inefficient when a > 1; in particular, there is excessive vacancy creation.     

Employer and Employee Ignorance in Developing Countries: The Case of Trinidad and Tobago

The authors examine the degree of employer and employee ignorance about reservation and offer wages in Trinidad and Tobago and find this to be considerable. On average employers pay more than 26% above workers’ reservation wages, while employees earn 22% less than the maximum wage on offer, ceteris paribus. However, there are some differences across sub‐groups of jobs, particularly with regard to individuals’ lack of information about the best wage offers. Some differences are also found compared to previous results for developed nations, although the level of ignorance does not appear to be higher in Trinidad and Tobago.     

The Distribution of Earnings in an Equilibrium Search Model with State‐Dependent Offers and Counteroffers*

We construct an equilibrium job search model with on‐the‐job search in which firms implement optimal‐wage strategies under full information in the sense that they leave no rent to their employees and counter the offers received by their employees from competing firms. Productivity dispersion across firms results in wage mobility both within and across firms. Workers may accept wage cuts to move to firms offering higher future wage prospects. Equilibrium productivity dispersion across ex ante homogeneous firms can be endogenously generated. Productivity dispersion then generates a nontrivial wage distribution which is generically thin‐tailed, as typically observed in the data.     

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.     

Employment Protection Versus Flexicurity: On Technology Adoption in Unionised Firms*

We analyse how different labour‐market institutions – employment protection versus ‘flexicurity’– affect technology adoption in unionised firms. We consider trade unions’ incentives to oppose or endorse labour‐saving technology and firms’ incentives to invest in such technology. Increased flexicurity – interpreted as less employment protection and a higher reservation wage for workers – unambiguously increases firms’ incentives for technology adoption. If unions have some direct influence on technology, a higher reservation wage also makes unions more willing to accept technological change. Less employment protection has the opposite effect, as this increases the downside (job losses) of labour‐saving technology.     

UNEMPLOYMENT POLICIES IN AN ECONOMY WITH ADVERSE SELECTION

This paper studies the effects of unemployment policies in a simple static general equilibrium model with adverse selection in the labour market. Firms offer a contract that induces the self‐selection of workers. In equilibrium, all unskilled workers are screened out and some skilled workers are rationed out. It is shown that the provision of unemployment insurance raises involuntary unemployment by encouraging adverse selection, while unemployment assistance – or subsidy to unemployment – reduces involuntary unemployment. A simple efficiency wage model is also presented to show that either of the two policies reduces employment by taxing effort and subsidizing shirking. The key is whether the social role of unemployment is a sorting device or a worker discipline device.     

Identification of Search Models using Record Statistics

This paper shows how record-value theory, a branch of statistics that deals with the timing and magnitude of extreme values in sequences of random variables, can be used to recover features of the wage offer distribution in conventional search models. Using National Longitudinal Survey of Youth (NLSY) wage data, I show that the data are not compatible with specifications for the offer distribution characterized by extreme negative skewness. In addition, I show that my approach can be used to construct a bound on the returns to job seniority. My results suggest that job seniority plays only a minor role in the wage growth of the workers surveyed in the NLSY.     

Wage setting in the Colombian manufacturing industry

We show that wage setting in the Colombian manufacturing industry is not fundamentally driven by labour productivity in contrast to the standard theoretical prediction. On the contrary, internal institutional arrangements – payroll taxation, the minimum wage or the price wedge between manufacturing and consumption prices – together with a higher exposure to international trade – connected to the increasing globalization of the Colombian economy – appear as the crucial drivers. These findings lead us to question the political strategy followed to attain cost competitiveness in a context of growing exposure to international trade. Implementation of a true wage bargaining system is suggested as a critical policy target to prevent the disruptive economic consequences of the current wage‐setting mechanism and help rebalance the trade deficit.     

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.