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Wage Formation: Towards Isolating Search and Bargaining Effects from the Marginal Product

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  • Jeanne Tschopp

Abstract

This paper estimates the importance of workers’ outside options in wage determination. In models of search and bargaining, a worker’s wage is determined by the marginal product of labour and by a weighted average of wages in alternate jobs. Thus, the nature of the wage equation makes it difficult to isolate changes in workers’ outside options that are independent from changes in the marginal product of labour. This paper builds on the predictions of a search and bargaining model with multiple cities, industries and occupations to propose novel identification strategies. Using a unique administrative panel database for Germany, the study exploits differences in both the employment composition across cities and in job-specific skill transferability as sources of variation for identification. The main finding of the paper is that a 10% increase in the outside options of a worker generates a 7% wage increase.
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Suggested Citation

  • Jeanne Tschopp, 2017. "Wage Formation: Towards Isolating Search and Bargaining Effects from the Marginal Product," Economic Journal, Royal Economic Society, vol. 127(603), pages 1693-1729, August.
    • Handle: RePEc:wly:econjl:v:127:y:2017:i:603:p:1693-1729
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    File URL: http://hdl.handle.net/10.1111/ecoj.2017.127.issue-603
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    Citations

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    Cited by:

    1. David Green, 2026. "Respect: Empirical Labour Economics and Distributive Justice," RFBerlin Discussion Paper Series 26153, ROCKWOOL Foundation Berlin (RFBerlin).
    2. David A. Green, 2015. "Chasing after good jobs. Do they exist and does it matter if they do?," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1215-1265, November.
    3. David A. Green & René Morissette & Ben M. Sand & Iain Snoddy, 2019. "Economy-Wide Spillovers from Booms: Long-Distance Commuting and the Spread of Wage Effects," Journal of Labor Economics, University of Chicago Press, vol. 37(S2), pages 643-687.
    4. Salvanes, Kjell G & Dodini, Samuel & Willén, Alexander, 2021. "The Dynamics of Power in Labor Markets: Monopolistic Unions versus Monopsonistic Employers," CEPR Discussion Papers 16834, Centre for Economic Policy Research.
    5. David A. Green, 2014. "What Is a Minimum Wage For? Empirical Results and Theories of Justice," Canadian Public Policy, University of Toronto Press, vol. 40(4), pages 293-314, December.
    6. Tschopp, Jeanne, 2015. "The Wage Response to Shocks: The Role of Inter-Occupational Labour Adjustment," Labour Economics, Elsevier, vol. 37(C), pages 28-37.
    7. Michael J. Böhm & Ben Etheridge & Aitor Irastorza-Fadrique, 2024. "The impact of labour demand shocks when occupational labour supplies are heterogeneous," IFS Working Papers W24/28, Institute for Fiscal Studies.
    8. Germán Pupato & Ben Sand & Jeanne Tschopp, 2026. "Estimating the gains from trade in frictional local labor markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 128(1), pages 152-200, January.
    9. David Green & Ben M. Sand & Iain G. Snoddy, 2022. "The impact of unions on nonunion wage setting: threats and bargaining," IFS Working Papers W22/31, Institute for Fiscal Studies.

    More about this item

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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