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Wage Rigidity and Labor Market Dynamics with Sorting

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  • Schulz, Bastian

Abstract

This paper adds two-sided ex-ante heterogeneity and a production technology inducing sorting to the canonical Diamond-Mortensen-Pissarides (DMP) search and matching model. Ex-ante heterogeneity and sorting have important implications for the dynamic properties of the model. The modifications solve the problem that standard DMP models do not generate enough volatility in response to shocks, also known as the "Shimer Puzzle" (Shimer, 2005). Amplification to overcome the volatility puzzle stems from an endogenously generated wage rigidity, which is of reasonable magnitude given empirical evidence from the U.S. labor market. Additionally, endogenous matching sets fluctuate in response to shocks and amplify job-creation. Using a standard Nash sharing rule, I show that the surplus function of the model, which depends on both the workers' and the firms' outside option, exhibits an asymmetry in equilibrium that stems from unequal bargaining powers. Using the standard calibration of the model, the firms' matching sets are wider in equilibrium than the workers' matching sets and fluctuate more in response to shocks.

Suggested Citation

  • Schulz, Bastian, 2015. "Wage Rigidity and Labor Market Dynamics with Sorting," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112932, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:112932
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
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    6. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
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    Cited by:

    1. Angerer, Silvia & Glätzle-Rützler, Daniela & Lergetporer, Philipp & Sutter, Matthias, 2016. "Cooperation and discrimination within and across language borders: Evidence from children in a bilingual city," European Economic Review, Elsevier, vol. 90(C), pages 254-264.
    2. Benjamin Lochner & Bastian Schulz, 2016. "Labor Market Sorting in Germany," CESifo Working Paper Series 6066, CESifo.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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