Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment
AbstractA rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model. Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5900.
Length: 31 pages
Date of creation: Aug 2011
Date of revision:
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Other versions of this item:
- Melvyn G. Coles & Dale T. Mortensen, 2011. "Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment," NBER Working Papers 17284, National Bureau of Economic Research, Inc.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D49 - Microeconomics - - Market Structure and Pricing - - - Other
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-22 (All new papers)
- NEP-DGE-2011-08-22 (Dynamic General Equilibrium)
- NEP-LAB-2011-08-22 (Labour Economics)
- NEP-LMA-2011-08-22 (Labor Markets - Supply, Demand, & Wages)
- NEP-LTV-2011-08-22 (Unemployment, Inequality & Poverty)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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