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Labor force participation and pair-wise efficient contracts with search and bargaining

  • Engelhardt, Bryan
  • Fuller, David L.

A “constant” wage is pair-wise inefficient in a standard search model when workers endogenously separate from employment. We derive a pair-wise efficient employment contract that involves workers paying a hiring fee (or bond) upon the formation of a match. We estimate the constant wage and pair-wise efficient contract assuming the hiring fee is unobservable, and find evidence to reject the pair-wise efficient contract in favor of the constant wage rule. A counterfactual experiment reveals the current level of labor force participation to be 9.6% below the efficient level, and a structural shift to the pair-wise efficient contract improves welfare by roughly 3.5%.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 19 (2012)
Issue (Month): 3 ()
Pages: 388-402

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Handle: RePEc:eee:labeco:v:19:y:2012:i:3:p:388-402
DOI: 10.1016/j.labeco.2012.02.001
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  17. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
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