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Efficient Sorting in Frictional Labor Markets with Two-sided Heterogeneity

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  • Luca Paolo Merlino

    (ECARES - European Center for Advanced Research in Economics and Statistics - ULB - Université libre de Bruxelles, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper studies how search externalities and wage bargaining distort vacancy creation and the allocation of workers to jobs in markets with two-sided heterogeneity. To do so, I propose a model of a frictional labor market where heterogeneous workers decide which job to look for and firms decide which technology to adopt. In equilibrium, there is perfect segmentation across sectors, which is determined by a unique threshold of workers' productivity. This threshold is inefficient due to participation and composition externalities. The Pigouvian tax scheme that decentralizes optimal sorting shows that these externalities have opposite signs. Furthermore, their relative strength depends on the distribution of workers' skills, so that when there are many (few) skilled workers, too many (few) high technology jobs are created.

Suggested Citation

  • Luca Paolo Merlino, 2016. "Efficient Sorting in Frictional Labor Markets with Two-sided Heterogeneity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01263744, HAL.
    • Handle: RePEc:hal:cesptp:hal-01263744
    DOI: 10.1017/S1365100514000212
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    Cited by:

    1. Luca Paolo Merlino & Pierpaolo Parrotta & Dario Pozzoli, 2018. "Gender Differences in Sorting," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 57(4), pages 671-709, October.

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