The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium
When match formation is costly and wage determination is decentralized, privately optimal investments in job and worker quality diverge from socially efficient outcomes. To explore this issue, I consider search equilibrium environments with endogenous quality distributions for jobs and workers. I show that a search equilibrium with decentralized wage setting exhibits excessive relative supplies of inferior jobs and inferior workers. Moreover, there are fundamental tensions between the standard wage-setting condition for an efficient total supply of jobs (and workers) in two-sided search models and the conditions required for efficient mixes of jobs and workers. I also derive the efficient wage structure, contrast its properties to the decentralized wage structure and evaluate the welfare and productivity gains of moving to an efficient wage structure. Numerical exercises show that centralized bargaining between a labor union and an employer confederation over the structure of wages can improve productivity and welfare by compressing job-related wage differentials.
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- Dale T. Mortensen, 1979.
"The Matching Process as a Non-Cooperative/Bargaining Game,"
384, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Davis, Steven J. & Henrekson, Magnus, 2005.
"Wage-setting institutions as industrial policy,"
Elsevier, vol. 12(3), pages 345-377, June.
- Henrekson, Magnus & Davis, Steven J., 2000. "Wage-Setting Institutions as Industrial Policy," Working Paper Series 529, Research Institute of Industrial Economics.
- Steven J. Davis & Magnus Henrekson, 2000. "Wage-Setting Institutions as Industrial Policy," NBER Working Papers 7502, National Bureau of Economic Research, Inc.
- Davis, Steven J. & Henrekson, Magnus, 2000. "Wage-setting Institutions as Industrial Policy," SSE/EFI Working Paper Series in Economics and Finance 352, Stockholm School of Economics, revised 05 Aug 2003.
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