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Efficient Labor Force Participation with Search and Bargaining

  • Bryan Engelhardt

    ()

    (Department of Economics, College of the Holy Cross)

  • David L. Fuller

    (Concordia University)

A fixed wage is inefficient in a standard search model when workers endogenously separate from employment. We derive an efficient employment contract that involves agents paying a hiring fee (or bond) upon the formation of a match. We estimate the fixed wage and efficient contract assuming the hiring fee is unobservable, and find evidence to reject the efficient contract in favor of the fixed wage rule. A counterfactual experiment reveals the current level of labor force participation to be 9% below the efficient level, and a structural shift to the efficient contract improves welfare by nearly 4%.

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File URL: http://web.holycross.edu/RePEc/hcx/HC0909-Engelhardt-Fuller_LaborSearch.pdf
File Function: Revised version, November 2009
Download Restriction: no

Paper provided by College of the Holy Cross, Department of Economics in its series Working Papers with number 0909.

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Length: 29 pages
Date of creation: Jul 2009
Date of revision: Nov 2009
Handle: RePEc:hcx:wpaper:0909
Contact details of provider: Phone: (508)793-3362
Fax: (508) 793-3708
Web page: http://www.holycross.edu/departments/economics/website/

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  1. Bryan Engelhardt & Guillaume Rocheteau & Peter Rupert, 2007. "Crime and the labor market: a search model with optimal contracts," Working Paper 0715, Federal Reserve Bank of Cleveland.
  2. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  3. Garibaldi, Pietro & Wasmer, Etienne, 2003. "Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows," CEPR Discussion Papers 3986, C.E.P.R. Discussion Papers.
  4. Christopher Flinn & James Mabli, 2008. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," Carlo Alberto Notebooks 91, Collegio Carlo Alberto.
  5. repec:inr:wpaper:155908 is not listed on IDEAS
  6. Christian Bontemps & Jean-Marc Robin & Gérard J. Van den Berg, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," Post-Print hal-00357755, HAL.
  7. Bowlus, Audra J & Kiefer, Nicholas M & Neumann, George R, 1995. "Estimation of Equilibrium Wage Distributions with Heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages S119-31, Suppl. De.
  8. Flinn, C. & Heckman, J., 1982. "New methods for analyzing structural models of labor force dynamics," Journal of Econometrics, Elsevier, vol. 18(1), pages 115-168, January.
  9. Margaret Stevens, 2000. "Wage-Tenure Contracts in a Frictional Labour Market: Firms Strategies for Recruitment and Retention," Economics Series Working Papers 2000-W10, University of Oxford, Department of Economics.
  10. 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.
  11. Pries, Michael & Rogerson, Richard, 2009. "Search frictions and labor market participation," European Economic Review, Elsevier, vol. 53(5), pages 568-587, July.
  12. Bonilla Roberto & Burdett Kenneth, 2010. "On-the-Job Search and Labor Market Equilibrium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-28, March.
  13. Carmichael, H Lorne, 1990. "Efficiency Wage Models of Unemployment--One View," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 269-95, April.
  14. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, 07.
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