Labor force participation and pair-wise efficient contracts with search and bargaining |
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Authors: | Bryan Engelhardt David L Fuller |
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Institution: | 1. Bank of Italy, Structural Economic Analysis Department, Italy;2. Bank of Italy, Regional Economic Research Division, Bologna Branch, Italy |
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Abstract: | A “constant” wage is pair-wise inefficient in a standard search model when workers endogenously separate from employment. We derive a pair-wise efficient employment contract that involves workers paying a hiring fee (or bond) upon the formation of a match. We estimate the constant wage and pair-wise efficient contract assuming the hiring fee is unobservable, and find evidence to reject the pair-wise efficient contract in favor of the constant wage rule. A counterfactual experiment reveals the current level of labor force participation to be 9.6% below the efficient level, and a structural shift to the pair-wise efficient contract improves welfare by roughly 3.5%. |
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