School of Economics
University of Edinburgh
30 Buccleuch Place
Edinburgh, EH8 9JT
Research interests: Macroeconomics, Labor economics
Abstract: This paper provides a solution for how to model bargaining in models with on-the-job search. A model featuring infrequent renegotiation of wages is proposed. With renegotiation, the equilibrium wage distribution and the bargaining outcomes are both unique and the model nests earlier models in the literature as limit cases when frequency of renegotiation goes to zero or to infinity. Furthermore, the rate of renegotiation affects the nature of the equilibrium. A higher rate of renegotiation lowers the response of the match duration to a wage increase, which decreases a firm's willingness to accept higher wages. This results in a lower share of the match surplus going to workers. Moreover, a high rate of renegotiation also lowers the positive wage spillovers from a minimum wage increase, since these spillovers rely on firms' incentives to use higher wages to reduce turnover.
Abstract: The canonical equilibrium job ladder model is much used in labor research due to its ability to replicate empirical features relating to the wage distribution and employment dynamics. However, the search process for workers is highly stylized. The job offer arrival rate only varies by employment status and the distributions of accepted wages are independent of career histories. We extend the model so that the labor demand for a particular worker stochastically varies over time. The resulting model has on- and off-the-job search in a thin labor market while retaining analytical tractability. When the thickness of a worker's market is constant, we nest the standard job ladder model. Our estimates, suggest that the dynamics of the market thickness play a crucial role in explaining unemployment, worker values and the dispersion of wages. The model is estimated on U.S. survey data and identified using wage data and employment dynamics.
Abstract: A wide class of models with On-the-Job Search (OJS) predicts that workers gradually select into better-paying jobs, until lay-off occurs, when this selection process starts over from scratch. We develop a simple methodology to test these predictions. Our inference uses two sources of identification to distinguish between returns to experience and the gains from OJS: (i) time-variation in job-finding rates and (ii) the time since the last lay-off. Conditional on the termination date of the job, job duration should be distributed uniformly. Using extreme value theory, we can infer the shape of the wage-offer distribution from the effect of the time since the last lay-off on wages. This methodology is applied to the NLSY 79. We find remarkably strong support for all implications. The offer distribution is Gumbel, which has an unbounded support, which is inconsistent with pure sorting models. The standard deviation of wage offers is 7 to 15% (depending on educational level and urbanisation). OJS accounts for 30% of the experience profile and 9% of total wage dispersion. The average wage loss after lay-off is 11%.
Wage Posting, Nominal Rigidity, and Cyclical Inefficiencies (joint with Coen Teulings) [New draft coming soon]
Abstract: We consider a Burdett-Mortensen style wage posting model with aggregate shocks. We analyze the equilibrium under two alternative assumptions on wage setting in ongoing jobs: either fully flexible or downwardly rigid. In the model firms optimally pay only retention premiums. The equilibrium is characterized by a Taylor expansion. The model yields two simultaneous relations for wages and quits, of which the parameters are simple functions of three empirically observable arrival rates of: (i) jobs, (ii) lay offs, and (iii) aggregate shocks. Hence, there are overidentifying restrictions, which are supported remarkably well by the data. We find strong evidence for wage downward rigidity and inefficiently low job-to-job transitions during the downturn. Furthermore, we find evidence that firms pay only retention premiums, not hiring premiums. A model with wage rigidity in ongoing jobs and OJS is therefore a useful benchmark for a wage equation in macro models.