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Labor Force Participation and Pair-wise Efficient Contracts with Search and Bargaining

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Abstract

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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  • David L. Fuller & Bryan Engelhardt, 2010. "Labor Force Participation and Pair-wise Efficient Contracts with Search and Bargaining," Working Papers 12005, Concordia University, Department of Economics, revised 20 Jan 2012.
    • Handle: RePEc:crd:wpaper:12005
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    Keywords

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    JEL classification:

    • J0 - Labor and Demographic Economics - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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