Job Search, Bargaining, and Wage Dynamics

What are the sources of rapid wage growth during a worker’s early career? To address this question, I construct and estimate a model of strategic wage bargaining with on-the-job search to explore three different components of wages: general human capital, match-specific capital, and outside option. Workers search for alternative job opportunities on the job and accumulate human capital through learning-by-doing. As the workers find better job opportunities, the current employer has to compete with outside firms to retain them. This between-firm competition improves the outside option value of the worker, which results in wage growth on the job even when productivity remains the same. The model is estimated by a simulated minimum distance estimator and data from the NLSY 79. The parameter estimates are used to simulate counterfactuals. The results indicate that the improved value of outside option raises wages of ten-year-experienced workers by 16%, which accounts for about 30% of the wage growth during the first ten years of career. I also find that human capital accumulation affects wage profile not only because it directly changes labor productivity, but also because it alters job search behavior due to low future productivity.