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An Equilibrium Search Model with Optimal Wage-Experience Contracts

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  • Carlos Carrillo-Tudela

    (University of Leicester)

Abstract

The objective of this paper is to study equilibrium in a labour market, in which workers search on the job and firms offer wage contracts conditional upon workers' experience and employment status. In this environment, the optimal contract can be described by a promotion contract. The distribution of contract offers is dispersed within and across experience levels. As workers stay longer in the market and promotion dates get closer, the option value of holding a job increases. Firms offer early promotions to attract more experienced workers. A positive relation between experience and earnings can arise purely from firms' optimal response to labour market competition brought about by workers' on-the-job search. We characterise the offer distribution for each experience level and show how these change with labour market conditions. (Copyright: Elsevier)

Suggested Citation

  • Carlos Carrillo-Tudela, 2009. "An Equilibrium Search Model with Optimal Wage-Experience Contracts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 108-128, January.
  • Handle: RePEc:red:issued:06-134
    DOI: 10.1016/j.red.2008.02.001
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    References listed on IDEAS

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    1. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 989-1016, November.
    2. Manning, Alan, 2011. "Imperfect Competition in the Labor Market," Handbook of Labor Economics, Elsevier.
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    8. Lazear, Edward P. & Oyer, Paul, 2004. "Internal and external labor markets: a personnel economics approach," Labour Economics, Elsevier, vol. 11(5), pages 527-554, October.
    9. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 535-551.
    10. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
    11. Fabien Postel-Vinay & Jean-Marc Robin, 2004. "To Match or Not to Match? Optimal Wage Policy With Endogenous Worker Search Intensity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 297-330, April.
    12. Giuseppe Moscarini, 2004. "Job-to-job quits and corporate culture," 2004 Meeting Papers 38, Society for Economic Dynamics.
    13. Carrillo-Tudela, C, 2004. "Wage-Tenure Contracts, Experience and Employment Status," Economics Discussion Papers 2735, University of Essex, Department of Economics.
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    Citations

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    Cited by:

    1. Carlos Carrillo-Tudela, 2010. "Job Search, Human Capital and Wage Inequality," 2010 Meeting Papers 723, Society for Economic Dynamics.
    2. Ken Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2016. "Wage Inequality: A Structural Decomposition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 20-37, January.
    3. Ronald Wolthoff, 2014. "It'S About Time: Implications Of The Period Length In An Equilibrium Search Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 839-867, August.
    4. Xiao, Chaoqun & Tang, Wansheng & Zhao, Ruiqing & Zhou, Chi, 2013. "Equilibrium search with heterogeneous firms, workers and endogenous human capital," MPRA Paper 52136, University Library of Munich, Germany.
    5. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Search; Wage dispersion; Experience; Contracts;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • 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

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