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An Equilibrium Search Model with Optimal Wage-Experience Contracts

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  • Carlos Carrillo-Tudela

    (University of Leicester)

Abstract

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. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2008.02.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 1 (January)
Pages: 108-128

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Handle: RePEc:red:issued:06-134

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Keywords: Search; Wage dispersion; Experience; Contracts;

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References

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  1. Jolivet, Gregory & Postel-Vinay, Fabien & Robin, Jean-Marc, 2006. "The empirical content of the job search model: Labor mobility and wage distributions in Europe and the US," European Economic Review, Elsevier, vol. 50(4), pages 877-907, May.
  2. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "To Match or Not To Match ? Optimal Wage Policy with Endogenous Worker search Intensity," Working Papers 2002-59, Centre de Recherche en Economie et Statistique.
  3. Stevens, M., 2000. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Stratgies for Recruitment and Retention," Economics Papers 2000-w10, Economics Group, Nuffield College, University of Oxford.
  4. James L. Medoff & Katharine G. Abraham, 1980. "Experience, Performance, and Earnings," NBER Working Papers 0278, National Bureau of Economic Research, Inc.
  5. Topel, Robert H & Ward, Michael P, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 439-79, May.
  6. Dustmann, Christian & Meghir, Costas, 1999. "Wages, Experience and Seniority," CEPR Discussion Papers 2077, C.E.P.R. Discussion Papers.
  7. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  8. Joseph G. Altonji & Nicolas Williams, 2005. "Do wages rise with job seniority? A reassessment," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(3), pages 370-397, April.
  9. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
  10. Alan Manning, 2010. "Imperfect competition in the labour market," LSE Research Online Documents on Economics 28729, London School of Economics and Political Science, LSE Library.
  11. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, 09.
  12. Rubinstein, Yona & Weiss, Yoram, 2006. "Post Schooling Wage Growth: Investment, Search and Learning," Handbook of the Economics of Education, Elsevier.
  13. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  14. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  15. Edward P. Lazear & Paul Oyer, 2003. "Internal and External Labor Markets: A Personnel Economics Approach," NBER Working Papers 10192, National Bureau of Economic Research, Inc.
  16. Giuseppe Moscarini, 2004. "Job-to-job quits and corporate culture," 2004 Meeting Papers 38, Society for Economic Dynamics.
  17. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
  18. Parent, Daniel, 2000. "Industry-Specific Capital and the Wage Profile: Evidence from the National Longitudinal Survey of Youth and the Panel Study of Income Dynamics," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 306-23, April.
  19. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 989-1016, November.
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Citations

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Cited by:
  1. Carlos Carrillo-Tudela, 2012. "Job Search, Human Capital and Wage Inequality," CESifo Working Paper Series 3979, CESifo Group Munich.
  2. Xiao, Chaoqun & Tang, Wansheng & Zhao, Ruiqing & Zhou, Chi, 2013. "Equilibrium search with heterogeneous firms, workers and endogenous human capital," MPRA Paper 52136, University Library of Munich, Germany.
  3. Melvyn Coles & Carlos Carrillo-Tudela & Ken Burdett, 2008. "Human Capital Accumulation and Labor Market Equilibrium," 2008 Meeting Papers 1088, Society for Economic Dynamics.
  4. Ronald Wolthoff, 2013. "It's About Time: Implications of the Period Length in an Equilibrium Search Model," Working Papers tecipa-476, University of Toronto, Department of Economics.
  5. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, Institute for the Study of Labor (IZA).
  6. repec:ese:iserwp:2012-23 is not listed on IDEAS

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