Abstract
We develop an empirical search-matching model which is suitable for analyzing the wage, employment and welfare impact of regulation in a labor market with heterogeneous workers and jobs. To achieve this we develop an equilibrium model of wage determination and employment which extends the current literature on equilibrium wage determination with matching and provides a bridge between some of the most prominent macro models and microeconometric research. The model incorporates productivity shocks, long-term contracts, on-the-job search and counter-offers. Importantly, the model allows for the possibility of assortative matching between workers and jobs due to complementarities between worker and job characteristics. We use the model to estimate the potential gain from optimal regulation and we consider the potential gains and redistributive impacts from optimal unemployment benefit policy. Here optimal policy is defined as that which maximizes total output and home production, accounting for the various constraints that arise from search frictions. The model is estimated on the NLSY using the method of moments.
Highlights
IntroductionWithin a competitive framework regulation would be welfare reducing, as it would typically reduce employment and increase insiders’ wages
Labor market imperfections justify labor market interventions
A fortiori, no empirical study has evaluated the role of standard labor market regulations, such as unemployment insurance, in augmenting or reducing mismatch
Summary
Within a competitive framework regulation would be welfare reducing, as it would typically reduce employment and increase insiders’ wages. Any friction constraining the allocation of workers to jobs inevitably spawns many mismatched job-worker pairs and allows some agents to appropriate a greater share of the rent than a central planner would deem fit. In the large body of literature using search models to describe labor markets with heterogeneous agents, no paper, as far as we has estimated a search-matching model with two-sided heterogeneity and used it to infer the welfare cost of mismatched workers and firms. A fortiori, no empirical study has evaluated the role of standard labor market regulations, such as unemployment insurance, in augmenting or reducing mismatch. Our aim in this paper is to lay a first foundation stone to fill this gap
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