Abstract: This paper develops a search model with heterogeneous workers, firms, and on-the-job search. Employed low-skilled workers are allowed to seek better paid jobs at high productivity firms. Low productivity firms make take-it-or-leave-it wage offers, whereas high productivity firms use Nash bargaining over wages. There are two important sources of inefficiency in the model besides the well-known classical search externality. First, low-skilled workers do not have any bargaining power when they are employed at low productivity firms. Second, the two types of workers are pooled in the same submarket. We demonstrate that lump-sum transfers paid to workers can internalize these inefficiencies. Moreover, both types of firms may benefit from the increase in the supply of low-skilled workers when the productivity difference in the two job for these workers is large, as a result the overall wage gap among workers increase. On the contrary, when the productivity difference is small, the effects are reversed. Finally, both types of firms emerge in the equilibrium when firms are allowed to open vacancies in both submarkets. On the one hand, it is attractive for firms to open vacancies in the low productivity submarket since they pay low wages to workers. On the other hand, it is also profitable for firms to open vacancies in the high productivity submarket because the probability of jobs being filled with low-skilled workers increase significantly, even though the bargained wages of high-skilled workers increase.
Abstract: This paper develops a search and matching model with heterogeneous firms, on-the-job search by workers, Nash bargaining over wages and adaptive learning. We assume that workers are boundedly rational in the sense that they do not have perfect foresight about future bargaining outcomes. Instead workers rely on a recursive OLS learning mechanism and base their forecasts on the linear wage regression with the firm's productivity and worker's current wage as regressors. For a restricted set of parameters we show analytically that the Nash bargaining solution is unique. We embed this solution into the agent-based simulation and provide a numerical characterization of the Restricted Perception Equilibrium. First, our model replicates the hump-shape of the earning distribution due to the interaction of firms' heterogeneity and on-the-job search. Moreover, wage dispersion and skewness of the distribution increase with the bargaining power of workers. Second, some job-to-job transitions are socially inefficient since workers can move to less productive employers. Output losses from these transitions decrease with workers' bargaining power due to a more efficient allocation of workers to jobs. Third, our model captures empirical evidence on the wage penalties in new jobs following a spell of unemployment (unemployment scarring). Finally, we find that bounded rationality taking form of adaptive learning can reduce wage inequality among heterogeneous worker groups if workers' expectations are based on pooled statistical information.
Work in progress
Parental Networks, Wage Expectations and the Intergenerational Educational Mobility (with Mariya Mitkova and Anna Zaharieva)