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Wage Dispersion with Heterogeneous Wage Contracts

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  • Cynthia L. Doniger

Abstract

I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either posted wages or wage contracts contingent on outside options. Firm level costs for contingent contracts generate a separating equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations even when most firms post wages. Using German employee-level administrative data, I estimate roughly 70 percent of firms post wages and employ nearly 50 percent of workers under such contracts.

Suggested Citation

  • Cynthia L. Doniger, 2015. "Wage Dispersion with Heterogeneous Wage Contracts," Finance and Economics Discussion Series 2015-23, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-23
    DOI: 10.17016/FEDS.2015.023
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    References listed on IDEAS

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    Cited by:

    1. Christopher Taber & Rune Vejlin, 2020. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," Econometrica, Econometric Society, vol. 88(3), pages 1031-1069, May.
    2. Cynthia Doniger, 2018. "Falling Labor Share and Rising Inequality: The Role of Wage Contracts," 2018 Meeting Papers 526, Society for Economic Dynamics.
    3. Anton A. Cheremukhin & Paulina Restrepo-Echavarria, 2020. "Wage Setting Under Targeted Search," Working Papers 2020-041, Federal Reserve Bank of St. Louis.
    4. Christopher Flinn & James Mabli & Joseph Mullins, 2017. "Firms' Choices of Wage-Setting Protocols in the Presence of Minimum Wages," Working Papers 2017-070, Human Capital and Economic Opportunity Working Group.

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    Keywords

    Labor supply and demand; Market structure and pricing; Wages and compensation;
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