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Directed Search On the Job and the Wage Ladder

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  • Alain Delacroix
  • Shouyong Shi

Abstract

In this paper we characterize the equilibrium in a labor market where employed workers search on the job and firms direct the search by announcing wages and employment probabilities for the applicants. All workers/jobs are homogeneous and free entry of firms determines the number of jobs. The equilibrium features a wage ladder, with a finite number of rungs. Workers on each particular rung of the ladder choose (optimally) to apply to only the jobs at one level above their current wage, despite that they observe all higher wage offers. Workers choose not to leap several rungs at a time on the wage ladder because the jobs at one level above their current wage provide a significantly higher employment probability, and hence a higher expected surplus, than the jobs at two or more levels above. The wage ladder has the following properties: (i) The gap between two adjacent rungs on the ladder becomes smaller and smaller as wage increases; (ii) A worker s quit rate decreases with wage; (iii)A worker s wage, on average, increases with the employment duration; (iv) The average length of time an unemployed worker will take to return to his previous wage increases with that wage; (v) The density of offer wages decreases with wage; (vi) The density of employed wages can be decreasing, increasing, or hump-shaped. The directed search framework replicates empirical regularities on the wage path of workers and the distribution of offer and employed wages that undirected search cannot.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number shouyong-03-04.

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Length: 48 pages
Date of creation: 11 Jul 2003
Date of revision:
Handle: RePEc:tor:tecipa:shouyong-03-04

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Keywords: Directed Search; On-the-Job Search; Wage Ladder.;

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  1. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-49, November.
  2. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
  3. Pissarides, Christopher A, 1994. "Search Unemployment with On-the-Job Search," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 457-75, July.
  4. Shouyong Shi, 1998. "Product Market and the Size-Wage Differential," Working Papers 972, Queen's University, Department of Economics.
  5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  6. Kenneth Burdett & Shouyong Shi & Randall Wright, 1998. "Pricing with frictions," Working Papers 98-9, Federal Reserve Bank of Philadelphia.
  7. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  8. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  9. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  10. 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, vol. 39(2), pages 257-73, May.
  11. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  12. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
  13. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
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