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Fitting Equilibrium Search Models to Labor Market Data

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  • Audra J. Bowlus

    (Univ. of Iowa)

  • Nicholas M. Kiefer

    (Univ. of Iowa)

  • George R. Neumann

    (Univ. of Iowa)

Abstract

The essential idea of equilibrium search models of labour market behaviour is that wage policy matters. In contrast, the stylized neoclassical competitive model predicts that firms paying a wage above the competitive equilibrium will disappear; those offering less will attract no workers. The search approach introduces "friction" via information asymmetries. Here, firms that offer high wages are more attractive to workers, obtaining and retaining employees more readily than firms offering lower wages. Other things equal high wage firms generate lower profit per worker but make it up on volume. These simple ideas about wage policy have been stated in informal ways by several scholars. Hicks (1932, [1966]) discusses the 'Gospel of High Wages' whereby unusually successful employers pay high wages to have the "pick of the market" (p.36). Kerr (1954) initiated a long-surviving, although never mainstream, line of research on empirical correlates of wage policy that has since become known as "Dual Labour Market" theory. While these early discussions of wage policy are often colorful, formal content has been given to the ideas only recently in equilibrium search models by Albrecht and Axell (1984), Burdett (1990), Burdett and Mortensen (1995), and Mortensen (1990). In competitive models wage policy doesn't matter because by definition in equilibrium the law of one price holds: all workers of a given type receive the same wage. Even in simple monopsony models of the labour market (Card and Krueger (1995)) wage policy does not matter because the law of one price still holds, albeit at lower than the competitive level. In contrast, search models generate dynamic monopsony power for employers due to the presence of frictions such as the length of time it takes to find a new job. A firm's wage policy is important in such models because it directly affects the distribution of income in an economy. Moreover in such dynamic monopsony models public policy experiments such as introducing or changing a minimum wage can have employment effects that are quite different from those expected in the standard competitive case.

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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 9602006.

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Length: 27 pages
Date of creation: 28 Feb 1996
Date of revision: 05 Mar 1996
Handle: RePEc:wpa:wuwpem:9602006

Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- handbook (body in WordPerfect 5.1, 27 pages)
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Cited by:
  1. Ortega, Jaime, 2000. "Job Rotation as a Mechanism for Learning," CLS Working Papers 00-4, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
  2. Tomi Kyyrä, 2007. "Estimating Equilibrium Search Models from Finnish Data," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 139-165, Autumn.
  3. Steven Stern & John Pepper, 2001. "Empirical Search Models," Virginia Economics Online Papers 383, University of Virginia, Department of Economics.
  4. Pedersen, Peder J. & Smith, Nina, 2001. "International Migration and Migration policy in Denmark," CLS Working Papers 01-5, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
  5. Westergaard-Nielsen, Niels, 2001. "Danish Labour Market Policy: Is it worth it?," CLS Working Papers 01-10, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.

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