Unobservable Heterogeneity in Directed Search

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Unobservable Heterogeneity in Directed Search

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Peters, Michael

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Michael Peters

Abstract

This paper provides a directed search model designed to explain the residual part of wage variation left over after the impact of education and other observable worker characteristics has been removed. Workers have private information about their characteristics at the time they apply for jobs. Firms value these characteristics differently and can observe these characteristics once workers apply. They and hire the worker they most prefer. However, the characteristics aren't contractible, so firms can't condition their wages on them. The paper shows how to extend directed search arguments to handle this, allowing for arbitrary distributions of worker and firm types. The model is used to provide a functional relationship that ties together the wage distribution and the wage duration. This relationship provides a testable implication of the model. This relationship is used to provide a common property of wage distributions that guarantees that workers who leave unemployment at the highest wages also have the shortest unemployment duration. This is in strict contrast to the usual (and somewhat implausible) directed search story in which high wages are always accompanied by higher probability of unemployment.

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Paper provided by Microeconomics.ca Website in its series Micro Theory Working Papers with number peters-05-06-13-01-50-30.

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Length: 33 pages
Date of creation: 13 Jun 2005
Date of revision: 16 Oct 2009
Handle: RePEc:ubc:pmicro:peters-05-06-13-01-50-30

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For technical questions regarding this item, or to correct its listing, contact: (Michael Peters).

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-06-19 (All new papers)

References listed on IDEAS
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.:

Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January. [Downloadable!] (restricted)
Addison, John T. & Centeno, Mário & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute for the Study of Labor (IZA). [Downloadable!]
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. [Downloadable!] (restricted)
Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September. [Downloadable!] (restricted)

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Cited by:
(explanations, 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.)

Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]

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