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Unobservable Heterogeneity in Directed Search

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Author Info

  • Peters, Michael

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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File URL: http://microeconomics.ca/michael_peters/mixed_equilibrium.pdf
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Bibliographic Info

Paper provided by Vancouver School of Economics in its series Microeconomics.ca 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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Web page: http://www.economics.ubc.ca/

Related research

Keywords: wage setting; directed search; mixed equilibrium;

This paper has been announced in the following NEP Reports:

References

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  1. James Albrecht, Pieter Gautier, & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Application," Working Papers gueconwpa~03-03-02, Georgetown University, Department of Economics.
  2. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics.
  3. Manolis Galenianos & Philipp Kircher, 2005. "Directed Search with Multiple Job Applications," PIER Working Paper Archive 05-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute for the Study of Labor (IZA).
  5. 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.
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Citations

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Cited by:
  1. Manolis Galenianos & Philipp Kircher, 2012. "On the game-theoretic foundations of competitive search equilibrium," LSE Research Online Documents on Economics 29707, London School of Economics and Political Science, LSE Library.
  2. Kevin Lang & Jee-Yeon K. Lehmann, 2011. "Racial Discrimination in the Labor Market: Theory and Empirics," NBER Working Papers 17450, National Bureau of Economic Research, Inc.

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