IDEAS home Printed from https://ideas.repec.org/a/cuf/journl/y2020v21i1daitian.html
   My bibliography  Save this article

On the Efficiency of Wage-Setting Mechanisms with Search Frictions and Human Capital Investment

Author

Listed:
  • Darong Dai

    (Institute for Advanced Research (IAR), Key Labo-ratory of Mathematical Economics (SUFE), Ministry of Education of China, Shanghai University of Finance and Economics)

  • Guoqiang Tian

    (Department of Economics, Texas A&M University
    Institute for Advanced Studies in Finance and Economics, Hubei University of Economics)

Abstract

A challenge facing labor economists is to explain the existence of different wage-setting mechanisms. This paper investigates the relative efficiency of competitive wage, wage bargaining and wage posting. In a search-theoretical model with human capital investment we establish the conditions, which are associated to the cost structures of human capital investment and job vacancy creation, for one of them to prevail. The insight is that a mechanism generates the highest level of equilibrium welfare by achieving the best balance between aggregate output and aggregate cost. Under the Hosios condition and for a broad range of values of cost parameters, we obtain these results: if work- ers’ matching contribution is sufficiently larger than their output contribution, then wage posting prevails; if their output contribution is sufficiently larger than their matching contribution, then wage bargaining prevails; if these two contributions are sufficiently close to each other, then competitive wage pre- vails. These findings justify in some sense the evidences reported by Hall and Krueger (2012) and Brenzel et al. (2014).

Suggested Citation

  • Darong Dai & Guoqiang Tian, 2020. "On the Efficiency of Wage-Setting Mechanisms with Search Frictions and Human Capital Investment," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 1-40, May.
    • Handle: RePEc:cuf:journl:y:2020:v:21:i:1:daitian
    as

    Download full text from publisher

    File URL: http://down.aefweb.net/AefArticles/aef210101DaiTian.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Charlot, Olivier & Decreuse, Bruno, 2010. "Over-education for the rich, under-education for the poor: A search-theoretic microfoundation," Labour Economics, Elsevier, vol. 17(6), pages 886-896, December.
    2. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
    3. 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 827-849, November.
    4. John Moore & Nobuhiro Kiyotaki, 2008. "Liquidity, Business Cycles, and Monetary Policy," 2008 Meeting Papers 35, Society for Economic Dynamics.
    5. Masters, Adrian, 2011. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1017-1031, July.
    6. Brenzel, Hanna & Gartner, Hermann & Schnabel, Claus, 2014. "Wage bargaining or wage posting? Evidence from the employers' side," Labour Economics, Elsevier, vol. 29(C), pages 41-48.
    7. Charlot, Olivier & Decreuse, Bruno, 2005. "Self-selection in education with matching frictions," Labour Economics, Elsevier, vol. 12(2), pages 251-267, April.
    8. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    9. de Meza, David & Lockwood, Ben, 2010. "Too much investment? A problem of endogenous outside options," Games and Economic Behavior, Elsevier, vol. 69(2), pages 503-511, July.
    10. Charlot, Olivier & Decreuse, Bruno & Granier, Pierre, 2005. "Adaptability, productivity, and educational incentives in a matching model," European Economic Review, Elsevier, vol. 49(4), pages 1007-1032, May.
    11. Christopher Flinn & Joseph Mullins, 2015. "Labor Market Search And Schooling Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 359-398, May.
    12. Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," Working Paper Series WP15-10, Peterson Institute for International Economics.
    13. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    14. Kaas, Leo & Zink, Stefan, 2011. "Human capital investment with competitive labor search," European Economic Review, Elsevier, vol. 55(4), pages 520-534, May.
    15. Masters, Adrian M, 1998. "Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 477-494, May.
    16. Christopher Flinn & Joseph Mullins, 2015. "Labor Market Search And Schooling Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(2), pages 359-398, May.
    17. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    18. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    19. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    20. Burdett, Ken & Smith, Eric, 2002. "The low skill trap," European Economic Review, Elsevier, vol. 46(8), pages 1439-1451, September.
    21. Robert E. Hall & Alan B. Krueger, 2012. "Evidence on the Incidence of Wage Posting, Wage Bargaining, and On-the-Job Search," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 56-67, October.
    22. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    23. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    24. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 779-804.
    25. Moen, Espen R, 1999. "Education, Ranking, and Competition for Jobs," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages 694-723, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, vol. 20(C), pages 3-23.
    2. Charlot, Olivier & Malherbet, Franck, 2010. "Education and the Welfare Gains from Employment Protection," IZA Discussion Papers 4799, Institute of Labor Economics (IZA).
    3. Yujing Xu, 2022. "Unobservable investments, trade efficiency and search frictions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(2), pages 764-799, May.
    4. Jackson, Paul, 2023. "Equilibrium underemployment," Labour Economics, Elsevier, vol. 81(C).
    5. Olivier Charlot, 2006. "Éducation, destruction des emplois et performance du marché du travail dans un modèle d'appariement," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 5-33.
    6. Andrew Shephard & Modibo Sidibe, 2019. "Schooling Investment, Mismatch,and Wage Inequality," PIER Working Paper Archive 19-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    7. Kaas, Leo & Zink, Stefan, 2011. "Human capital investment with competitive labor search," European Economic Review, Elsevier, vol. 55(4), pages 520-534, May.
    8. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2012. "Investments in education and welfare in a two-sector, random matching economy," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 367-385.
    9. Charlot, Olivier & Decreuse, Bruno & Granier, Pierre, 2005. "Adaptability, productivity, and educational incentives in a matching model," European Economic Review, Elsevier, vol. 49(4), pages 1007-1032, May.
    10. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    11. Masters, Adrian, 2011. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1017-1031, July.
    12. Guillaume Wilemme, 2021. "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 170-197, April.
    13. Marco Fongoni, 2018. "Workers' reciprocity and the (ir)relevance of wage cyclicality for the volatility of job creation," Working Papers 1809, University of Strathclyde Business School, Department of Economics.
    14. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
    15. Matteo Bobba & Luca Flabbi & Santiago Levy, 2022. "Labor Market Search, Informality, And Schooling Investments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 211-259, February.
    16. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    17. Jansen, Marcel, 2003. "Can job competition prevent hold-ups?," UC3M Working papers. Economics we035120, Universidad Carlos III de Madrid. Departamento de Economía.
    18. Martin, Chris & Wang, Bingsong, 2018. "Unemployment Volatility in a Behavioural Search Model," The Warwick Economics Research Paper Series (TWERPS) 1179, University of Warwick, Department of Economics.
    19. Matthias S. Hertweck & Vivien Lewis & Stefania Villa, 2021. "Going the Extra Mile: Effort by Workers and Job‐Seekers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2099-2127, December.
    20. George J. Mailath & Andrew Postlewaite & Larry Samuelson, 2017. "Premuneration Values and Investments in Matching Markets," Economic Journal, Royal Economic Society, vol. 127(604), pages 2041-2065, September.

    More about this item

    Keywords

    Competitive wage; Wage bargaining; Wage posting; Welfare com-parison; Human capital investment; Job search;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cuf:journl:y:2020:v:21:i:1:daitian. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Qiang Gao (email available below). General contact details of provider: https://edirc.repec.org/data/emcufcn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.