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Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment

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  • Melvyn G. Coles
  • Dale T. Mortensen

Abstract

A 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17284.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17284

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  1. Monika Merz & Eran Yashiv, 2005. "Labor and the Market Value of the Firm," CEP Discussion Papers, Centre for Economic Performance, LSE dp0690, Centre for Economic Performance, LSE.
  2. Giuseppe Moscarini & Fabien Postel-Vinay, 2010. "Stochastic Search Equilibrium," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1754, Cowles Foundation for Research in Economics, Yale University.
  3. Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," Working Papers, University of Toronto, Department of Economics tecipa-390, University of Toronto, Department of Economics.
  4. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 321.
  5. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  6. Melvyn G. Coles, 2001. "Equilibrium Wage Dispersion, Firm Size and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 159-187, January.
  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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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Cited by:
  1. Cai, Xiaoming & Gautier, Pieter A. & Teulings, Coen N. & Watanabe, Makoto, 2014. "Collective versus decentralized wage bargaining and the efficient allocation of resources," Labour Economics, Elsevier, Elsevier, vol. 26(C), pages 34-42.
  2. Kenneth Burdett, 2014. "A Tribute to Dale Mortensen," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 15(1), April.

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