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Directed Search for Equilibrium Wage-Tenure Contracts

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  • Shouyong Shi

Abstract

I construct a theoretical framework in which firms offer wage-tenure contracts to direct the search by risk-averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a non-degenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job-to-job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job-to-job transitions and contracts.

Suggested Citation

  • Shouyong Shi, 2008. "Directed Search for Equilibrium Wage-Tenure Contracts," Working Papers tecipa-343, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-343
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    More about this item

    Keywords

    Directed search; On-the-job search; Wage-tenure contracts;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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