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 jobs 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.

Highlights

  • The purpose of this paper is to examine the role of on-the-job search and the workers’ skill composition on labour market equilibrium while focusing on the welfare of the labour force

  • Denote with K entry cost paid by each firm, and with v the total number of vacancies created by both types of firms. Firms learn their own types: with probability η the firm is of low productivity and uses take-it-or-leave-it wage offers, while with probability (1 − η) it is of high productivity and rely on Nash bargaining to determine wages

  • We find that opening more vacancies by high productivity firms has a positive effect on low productivity firms, since it entails that the equilibrium reservation wages of low-skilled workers diminish

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Summary

Introduction

The purpose of this paper is to examine the role of on-the-job search and the workers’ skill composition on labour market equilibrium while focusing on the welfare of the labour force. It encourages firms to open vacancies in the high productivity submarket because they expect high profits by hiring more experienced low-skilled workers As a result, both type of firms emerge in the equilibrium in our benchmark economy. It is shown that all firms choose Nash bargaining when cost of opening vacancy and separation rates are low, matching efficiency is high, and workers are high productive In contrast to their results we find that both types of firms emerge in the equilibrium. They show that the decentralized equilibrium is inefficient, there exist policy instruments that are able to restore efficient outcomes They assume that high ability workers have large number of social contacts which contributes to the large wage gap between low and high ability workers and to the large difference of the unemployment rates. Firm type Low productive High productive Worker type (Take-it-or-leave-it) (Nash bargaining)

Value functions
Wage determination and entry conditions
Exogenous participation
Endogenous participation
Numerical results
Comparative statics
The optimal policy
Findings
Conclusion
Full Text
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