Standard Search Model Research Articles

State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector

This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model a la Pissarides (2000) with formal and informal sectors to show how a government's auditing of informal firms and barriers to firms' entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms' bargaining position vis-a-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus (e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare.

Option to wait in a search model

We consider a standard search model with buyers and sellers. Upon meeting the buyers make a take-it-or-leave-it offer, but the sellers have an option not to trade immediately but wait for more agents to appear. If more buyers come, there is excess demand, and the buyers engage in auction to get the good. Analogously, if more sellers come, the sellers engage in a Bertrand-type pricing game to sell the object. The option to wait restricts the price offer of the buyer; in an equilibrium in which trades are consummated without delay there is a unique price offer for the buyer.

Wage and price controls in the equilibrium sequential search model

In this paper, we study the effects of wage and price controls on employment, output, and welfare in a simplified version of the Bénabou (J. Econom. Theory 60 (1993) 140) equilibrium sequential search model with bilateral heterogeneity. We show that a price ceiling increases output but the change in welfare depends on three effects: the reduction in aggregate search costs, the increase in surplus due to increased output, and the transfer of production to the least efficient firm. The model is formally identical to a standard equilibrium search model of the labor market so analogous results hold for the minimum wage.

Optimism and overconfidence in search

In a standard search model I relax the assumption that agents know the distribution of offers and characterize the behavioral and welfare consequences of overconfidence. Optimistic individuals search longer than pessimists if they are equally “stubborn” and high offers are good news. Otherwise, the pessimists search longer. The welfare of unbiased individuals is larger than that of overconfident decision makers if the latter's biases are large and searchers stubborn. Otherwise, the overconfident may be better off. Finally, I give a testable implication of overconfidence and discuss some applications and policy issues.

Fixed or Flexible? Wage‐setting in Search Equilibrium

Why do some vacancies offer a posted wage whereas others offer a negotiable wage? The paper endogenizes the choice of wage policy in a standard sequential search model with heterogeneous workers. In particular, we identify circumstances such that there exists an equilibrium in which all firms negotiate wages. We find that this equilibrium exists if and only if the labour market is sufficiently tight and worker heterogeneity is sufficiently large.

Can the labor market search model explain the fluctuations of allocations of time?

We examine whether the labor market search model can account for the business cycle facts on the three uses of time: employment, unemployment and non-participation. The standard search model is modified by making endogenous the time allocation decision between market and non-market activities. Despite its good performance on the employment rate, this framework fails to mimic the empirical dynamics on the two other uses of time, notably the strongly countercyclical behavior of the unemployment rate. This conclusion is shown to be robust to the specification of households’ preferences.

Optimal labour taxation and search

This paper explores the optimal role of the tax system in alleviating labour-market imperfections and raising revenue. For this purpose, the standard search model of the labour market is extended by introducing scarce entrepreneurial talent and arbitrage between the supply and demand sides of the labour market. We study how these extensions affect the following two major implications of the standard model: (1) only the ad valorem component of the wage tax should be employed to raise revenue; (2) the optimal tax system should not distort labour-market tightness.

About bargaining power

I consider a standard search model where agents have an option to wait for other agents upon meeting someone. This restricts the bargaining power that can be assigned to the agents when modelling trading as immediate.

Should unemployment benefits decrease with the unemployment spell?

In this paper, we investigate whether unemployment benefits should decrease with the unemployment spell in a model where both job search intensity and wages are endogenous. Wages are set by collective agreements bargained by insiders. It is shown that a more declining time sequence of unemployment benefits leads to wage increases when the tax rate is given. Such an effect may imply an increase in unemployment and counteracts the response of job search intensity that can be found in standard job search models with a given wage distribution. Calibration exercises suggest that it costs twice as much in terms of welfare loss for the long-term unemployed workers to reduce the unemployment rate by 1% when wages are endogenous than in the standard job search model.

Overconfidence in Search

In a standard search model I relax the assumption that agents know the distribution of offers and characterize the behavioral and welfare consequences of overconfidence. Optimistic individuals search longer than pessimists if they are equally stubborn and high offers are good news. Otherwise, the pessimists search longer. The welfare of unbiased individuals is larger than that of overconfident decision makers if the latter's biases are large and searchers stubborn. Otherwise, the overconfident may be better off. Finally, I give a testable implication of overconfidence and discuss some applications and policy issues.

The Non‐Robustness of the Nash‐Stackelberg‐Hybrid Equilibrium

In a simple, standard sequential search model, the Nash‐Stackelberg‐Hybrid equilibrium is shown, in general, to be non‐robust when the assumption that all firms are constrained to operate one outlet is dropped. Unless the firms are constrained from increasing the number of outlets or the price, they will open additional outlets to increase their market power. In a standard duopoly model an equilibrium featuring both firms operating multiple outlets is shown to exist.

Offer heterogeneity in the standard search model: Implications for the duration of unemployment and reemployment wages

The standard search model implies that both the hazard and reemployment wages should be unrelated to unemployment spell length. However, existing studies have found that the hazard from unemployment and reemployment wages decline with unemployment spell length. This paper uses heterogeneity in the offer arrival process to derive predictions that are consistent with the empirical evidence. A characterization of the rates of change of the hazard and the expected reemployment wage over time in terms of variances and covariances is obtained. A non-parametric test based on a model of two types is constructed and implemented on US data.

Macroeconomic implications of search theory for the labour market

‘While the usual job search problem is a microeconomic one, this paper applies labour market data to a standard search model to extract macroeconomic implications. A theoretical relationship between the minimum wage, subsistence wage and reservation wage is posited and found to be violated in the data. The paper raises several issues of public policy. It finds that the minimum wage offered is low. It provides a measure of the ‘quality’ of the labour market, and discusses how it may be improved, by increasing the minimum wage, reducing bargaining between the supply and demand sides of the labour market, and curbing wage volatility.

Labor market search and capital accumulation: Some analytical results

Abstract This paper integrates labor market search into an intertemporal utility maximization framework and analytically solves for equilibrium dynamics. The integrated model improves upon a neoclassical model by generating the realistic hump-shaped response of output to a productivity shock and the counterclockwise dynamics of job vacancies and unemployment around the Beveridge curve. In contrast to a standard search model, our model endogenizes agents' reservation wage as the marginal rate of substitution between leisure and consumption, through which agents' intertemporal consumption decision directly affects the labor market behavior. As a result, even a permanent productivity shock generates non-monotonic dynamics in employment.

Technology, unemployment and efficiency

This paper analyzes technology choices and unemployment in search equilibrium. In contrast to standard search models, the presence of technology choices makes the decentralized equilibrium inefficient; there is too little investment in skills, too little job creation and there can be multiple equilibria. The paper also shows that technological progress is likely to be slower in labor markets where job tenure is low.

Memory and Desire

Consumer product demand increases with non-informational advertising and with past product purchases. To these stylized facts, a third observation can be added: When agents are in a hurry, they are more likely to buy the product that they bought last time or the product which they saw recently on television. These three observations can be explained by using three stylized facts about human memory. These facts are: 1) Memory contains information about products. 2) Memory takes time to operate. 3) Memory is faster when the information has been recalled more frequently in the past. Remembering information in memory takes time, but time has a cost. Therefore the information in memory has a cost. This information cost rises with the cost of time and decreases with the speed of recall. The speed of recall increases with the frequency that the information has been recalled in the past. Therefore, the cost of information declines with the number of times the information has been previously recalled. This paper hypothesizes that advertising and product use cause agents to recall product information. This, in turn, makes recalling product information faster and cheaper relative to other goods. Therefore, the product is more likely to be recalled and purchased when agents have seen product advertising or used the product in the past. In addition, an increase in recall speed, caused by advertising and product use, reduces the relative cost of recalling product information more when the cost of time is higher. So, advertising and past product use will have larger marginal effects on product demand when the cost of time is higher. That is, when agents are in a hurry, they will be more likely to buy highly advertised or frequently used products than when their cost of time is lower. The process of recall can be viewed as an optimal stopping problem. So, the formal framework of this model is similar to the standard sequential search model'. However, the spirit of the paper is closest to Salop and Stiglitz (1977) and Hauser and Wernerfelt (1990). They use a Stigler-type

Investigating the Effect of the Optimality Constraint on Parameter Estimates in a Job Search Model

In a standard job search model, an unemployed worker maximizes the expected present discounted value of his income stream while facing a stationary environment. It can be shown that the optimal policy for the worker to follow is a reservation wage policy. This involves the worker accepting wages above a certain cut-off wage called the reservation wage and rejecting others. The implicit equation defining this reservation wage is termed the optimality constraint in the job search literature. The optimality constraint implies a specific relationship between the reservation wage, the arrival rate of offers, the wage distribution, the discount rate and the unemployment benefit. The goal of this paper is to study the effect of the imposition of the optimality constraint in a simple job search model. I compare estimates of parameters obtained when the optimality constraint is imposed to those obtained when the constraint is not imposed. This constraint is also tested for a given set of data. Although it is difficult to impose, this constraint has been used to identify the parameters of a job search model. Some studies, including Lancaster and Chesher(1988) use the optimality constraint to deduce the effect of the unemployment benefit on the reservation wage and the mean duration of unemployment. Studies that do not use the optimality constraint often assume that the reservation wage is a linear function of explanatory variables and deduce elasticities using a regression approach as in Ehrenberg and Oaxaca(1976). Studies so far do not compare parameters estimates obtained with and without the optimality constraint, which is the contribution of my paper.

Self-employment in the midst of unemployment: the case of Spain and the United States

This article examines the relationship between unemloyment and self-employment. The possibility that self-employment is an alternative for jobless workers is discussed. In doing so, the standard job search model is used to show informally that if workers learn about the job market in the process of looking for work, those who have been unemployed for longer are more likely to become self-employed. Indeed, it was found that for both Spain and the United States the duration of unemployment significantly increases the probability of becoming self-employed. Further analysis indicates that part-time work and the absence of social security coverage are more likely to be associated with self-employed workers. In Spain, it was found that the self-employed without employees earn significantly less than other workers with similar characteristics.

UNEMPLOYMENT BENEFIT LEVELS AND SEARCH ACTIVITY

This paper endogenises the job offer arrival rate in a standard search model in order to test the hypothesis that unemployment-related benefits may affect the job search behavior of unemployed workers independently of any reservation wage effect. Using a pooled cross-section of 1484 unemployed British men from the 1979 to 1982 General Household Surveys, we find that the level of benefit has no significant effect on unemployed search behavior. Any disincentive effect of an increase in benefits on the return to job search is offset by a positive stimulus to search from increased income. Factors which do have an important impact on search activity include: age, unemployment duration, occupation, and education level. Further, local labor market conditions affect only the job search behavior of the short-term unemployed. Copyright 1993 by Blackwell Publishing Ltd

Costly diagnosis and price dispersion

In the standard search model under monopolistic competition, when the consumer encounters a seller he knows the price before purchasing the commodity. Consequently, the price cannot exceed the consumer's reservation price. In a market with rational and homogeneous agents the price distribution must therefore be degenerate. In markets for indivisible professional services the consumer does not necessarily know the price of the service when he encounters the seller. This possibility arises when the cost of ascertaining the price (the diagnosis cost) is high and the consumer decides to enter the market without searching. In contrast to the standard model, under monopolistic competition, price dispersion in equilibrium is possible even when fully rational economic agents on both sides of the market are homogeneous. We characterize such equilibria and provide a sufficient condition for their existence. We then study the effect of manipulating the search technology (typically, through a professional code of ethics) on the equilibrium in markets for such professional services.