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The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium

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Steven J. Davis

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Abstract

When match formation is costly and wage determination is decentralized, privately optimal investments in job and worker quality diverge from socially efficient outcomes. To explore this issue, I consider search equilibrium environments with endogenous quality distributions for jobs and workers. I show that a search equilibrium with decentralized wage setting exhibits excessive relative supplies of inferior jobs and inferior workers. Moreover, there are fundamental tensions between the standard wage-setting condition for an efficient total supply of jobs (and workers) in two-sided search models and the conditions required for efficient mixes of jobs and workers. I also derive the efficient wage structure, contrast its properties to the decentralized wage structure and evaluate the welfare and productivity gains of moving to an efficient wage structure. Numerical exercises show that centralized bargaining between a labor union and an employer confederation over the structure of wages can improve productivity and welfare by compressing job-related wage differentials.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8434.

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Date of creation: Aug 2001
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Handle: RePEc:nbr:nberwo:8434

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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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  1. Recursive Macroeconomic Theory
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  1. John Kennes, 2004. "Competitive Auctions: Theory and Application," Discussion Papers 04-16, University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  2. Lucas Navarro, 2007. "Labor market policies in a sector specific search model with heterogeneous firms and workers," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 22(2), pages 29-45, December. [Downloadable!]
  3. John Kennes & Ian Paul King & Benoit Julien, 2002. "'Residual' Wage Disparity in Directed Search Equilibrium," Macroeconomics 0205003, EconWPA. [Downloadable!]
  4. Jansen, Marcel, 2004. "Can Job Competition Prevent Hold-Ups?," IZA Discussion Papers 988, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Coen N. Teulings & Pieter A. Gautier, 2000. "The Right Man for the Job - Increasing Returns in Search?," Tinbergen Institute Discussion Papers 00-038/3, Tinbergen Institute. [Downloadable!]
  6. Samuel Danthine, 2005. "Two-Sided Search, Heterogeneous Skills and Labor Market Performance," IZA Discussion Papers 1572, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Pieter A. Gautier & Ronald P. Wolthoff, 2006. "Simultaneous Search with Heterogeneous Firms and Ex Post Competition," IZA Discussion Papers 2056, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Benoit Julien & John Kennes & Ian King, 2001. "Residual Wage Disparity and Coordination Unemployment," CAM Working Papers 2004-20, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2004. [Downloadable!]
    Other versions:
  9. Clara Ponsati & József Sákovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  10. Forslund, Anders & Lindh, Thomas, 2004. "Decentralisation of bargaining and manufacturing employment: Sweden 1970-96," Working Paper Series 2004:3, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
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