Outside options and the sharing of match-specific rents

We show that workers use outside options to extract match-specific rents. Exploiting unique data on worker skills, we construct a measure of match quality based on the relationship between workers’ multidimensional skills and job-specific skill requirements. Focusing on job-to-job movers, we first demonstrate that match quality associated with the previous job has a stronger impact on current wages than current match quality. This finding strongly suggests that job-to-job movers use previous match quality as an outside option in negotiations with their current employer. Our second key finding relates to wages within ongoing matches. We show that an improvement of local labor market conditions increases the wage return to match quality. This finding is robust to an unusually detailed set of controls, including job-year fixed effects that account for heterogeneity in wage cyclicality across jobs. Outside offers, which are more frequent in tighter labor markets, thus allow incumbent workers to extract a larger share of match-specific surplus. Hence, rent-sharing is pro-cyclical, counter to standard wage-sharing assumptions used in most empirical reduced-form specifications and in canonical search models.