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Wage Bargaining with On-The-Job Search: Theory and Evidence

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  • Cahuc, Pierre
  • Postel-Vinay, Fabien
  • Robin, Jean-Marc

Abstract

The Nash wage bargaining model is ubiquitous in modern labour economics. Yet most applications of this model ignore inter-employer competition for labour services and attribute all of the workers’ rent to their bargaining power. In this Paper, we write and estimate an equilibrium model with strategic wage bargaining and on-the-job search and use it to take another look at the determinants of wages in France. There are three essential determinants of wages in our model: productivity, competition between employers resulting from on-the-job search, and the workers’ bargaining power. We find that between-firm competition matters a lot in the determination of wages, as it is quantitatively more important than wage bargaining à la Nash in raising wages above the workers’ ‘reservation wages’, defined as out-of-work income. In particular, we detect no significant bargaining power for intermediate- and low-skilled workers, and a modestly positive bargaining power for high-skilled workers. In addition, the Paper provides some empirical information on the nature of sorting of workers by firms.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4154.

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Date of creation: Dec 2003
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Handle: RePEc:cpr:ceprdp:4154

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Keywords: labour market competition; search frictions; structural estimation; wage bargaining;

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References

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  1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
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  8. Van Reenen, John, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U.K. Companies," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 195-226, February.
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  11. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(05), pages 742-747, November.
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  16. Eckstein, Zvi & Wolpin, Kenneth I, 1995. "Duration to First Job and the Return to Schooling: Estimates from a Search-Matching Model," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 263-86, April.
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  20. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
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  22. Ridder, Geert & van den Berg, Gerard J., 2002. "A cross-country comparison of labor market frictions," Working Paper Series 2002:22, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  23. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  24. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
  25. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214 Elsevier.
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