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Unobservable Heterogeneity in Directed Search

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  • Peters, Michael

Abstract

This paper provides a directed search model designed to explain the residual part of wage variation left over after the impact of education and other observable worker characteristics has been removed. Workers have private information about their characteristics at the time they apply for jobs. Firms value these characteristics differently and can observe these characteristics once workers apply. They and hire the worker they most prefer. However, the characteristics aren't contractible, so firms can't condition their wages on them. The paper shows how to extend directed search arguments to handle this, allowing for arbitrary distributions of worker and firm types. The model is used to provide a functional relationship that ties together the wage distribution and the wage duration. This relationship provides a testable implication of the model. This relationship is used to provide a common property of wage distributions that guarantees that workers who leave unemployment at the highest wages also have the shortest unemployment duration. This is in strict contrast to the usual (and somewhat implausible) directed search story in which high wages are always accompanied by higher probability of unemployment.

Suggested Citation

  • Peters, Michael, 2005. "Unobservable Heterogeneity in Directed Search," Microeconomics.ca working papers peters-05-06-13-01-50-30, Vancouver School of Economics, revised 16 Oct 2009.
    • Handle: RePEc:ubc:pmicro:peters-05-06-13-01-50-30
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    File URL: http://microeconomics.ca/michael_peters/mixed_equilibrium.pdf
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    References listed on IDEAS

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    1. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
    2. James Albrecht & Pieter A. Gautier & Susan Vroman, 2006. "Equilibrium Directed Search with Multiple Applications," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 869-891.
    3. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute of Labor Economics (IZA).
    4. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
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    Cited by:

    1. Manolis Galenianos & Philipp Kircher, 2012. "On The Game‐Theoretic Foundations Of Competitive Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 1-21, February.
    2. Kevin Lang & Jee-Yeon K. Lehmann, 2012. "Racial Discrimination in the Labor Market: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 50(4), pages 959-1006, December.

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