Abstract
Other than in Part I, the focus of equilibrium search theory with wage posting lies on search frictions in labour markets and how they give rise to wage-setting power on the side of firms and to wage dispersion both on the side of firms and workers. Put differently, it aims to answer the question ‘Why are similar workers paid differently?,’ which is the subtitle of a monograph by Mortensen (2003) assessing this strand of theory, and ‘to explain both transitions in the labor market and the distribution of wages in the labor market in a coherent way.’ (Mortensen, 2003, p. xi)1
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Notes
- 1.
For a survey on alternative ways of modelling equilibrium wage dispersion, see Gaumont et al. (2006). Eckstein and van den Berg (2007) provide an overview on the empirical research that addresses labour market phenomena structurally utilising equilibrium search theory.
- 2.
A different approach is chosen by so-called search–matching–bargaining models where wages are determined bilaterally through a bargaining process after the worker and the employer have met instead of being set unilaterally by the employer. (For a survey, see Mortensen and Pissarides (1999) and Rogerson et al. (2005). Note that both approaches can be brought together as is done by Mortensen’s (2000) synthesis.) For most jobs, however, wage posting seems to be more realistic. ‘The idea that employers set the terms of employment while workers choose among available offers is consistent with how many labor economists view the wage setting process.’ (Mortensen and Pissarides, 1999, p. 2607) Furthermore, Manning (2003 a, pp. 14–16) stresses that monopsonistic wage posting does not necessarily imply that employers’ shares of employment rents are large. Eventually, we argue that wage posting’s explanative power is superior in terms of simplicity: As Burdett and Mortensen’s (1998) model can be thought of as a general equilibrium version of the special case of simple dynamic monopsony presented in Chapter 7, we are able to make use of this less complicated model or even the simple static monopsony model from Chapter 2 in many situations to gain clear-cut predictions, whilst we do not have such a simple model at hand when arguing within the search–matching–bargaining approach.
- 3.
Actually, Diamond’s (1971) model formulated a non-cooperative price-posting game at a commodity market characterised by incomplete information of consumers. Unsurprisingly, its results carry over to labour markets, just with the ‘opposite sign.’
- 4.
To generate wage dispersion with off-the-job search only, a source of heterogeneity must be added. For instance, workers are supposed to differ in their opportunity costs of employment, resulting in different reservation wages, or firms in their production technologies. The former source of heterogeneity was first analysed by Butters (1977), MacMinn (1980), and Albrecht and Axell (1984), the latter by Reinganum (1979) and Montgomery (1991). Other than these models, however, the models incorporating on-the-job search, such as those by Mortensen (1990) and Burdett and Mortensen (1998), have the virtue of generating wage dispersion and monopsony power of employers even for homogenous workers and firms, the only source of both phenomena being search frictions.
- 5.
Manning (2003 a, p. 37) modifies this setting slightly by assuming that the job destruction rate is given by δn and that all workers, both employed and non-employed, leave the labour market at a rate δr, being replaced by an equal number of workers entering the labour market as non-employed. Consequently, the total number of workers in the labour market is not changed, while the model now allows for (wage-inelastic) transitions from and to non-participation. He then moves on defining δ : = δn + δr, so that the following results will also hold for this modification.
- 6.
One may wonder whether this sort of perfect pre-commitment is restrictive. Since we will restrict our analysis to a steady-state environment in the following, this assumption seems reasonable in our eyes. Besides, Coles (2001) demonstrates that even without pre-commitment by firms things are the same as in this model if discounting of future profits becomes negligible.
- 7.
For details, see Cahuc and Zylberberg (2004, pp. 801–803).
- 8.
Burdett and Coles (2003) investigate the equilibrium of the wage-posting game with liquidity-constrained risk averse workers allowing firms to post contracts where the wage paid varies with workers’ tenure at the firm.
- 9.
For a derivation of (8.5), see Appendix B.2. The attentive reader may have realised that the notion of the reservation wage used here is slightly different from the notion of the reservation income used in Part I. Obviously, being non-employed and looking for a job is conceptually different from non-participation. For a discussion of this, see, e.g., Cahuc and Zylberberg (2004, pp. 115–118). Nevertheless, we follow the literature and refer to both thresholds as workers’ reservation wage or income, respectively, because there is no danger of confusion. Note that there is still another slight difference of these thresholds: In Part I, workers decided to supply labour, i.e., to participate in the labour market, if and only if their income exceeds their reservation income, while here they take up a particular job instead of staying non-employed if and only if their wage is no less than their reservation wage. While the two reservation wages (incomes) differ conceptually in the sense laid out above, this latter difference is only for analytical convenience and has no deeper meaning.
- 10.
Note again that we have a unit mass of firms. If we had a continuum of firms with mass J instead, both expressions would be divided by J.
- 11.
- 12.
- 13.
- 14.
- 15.
For surveys on the empirical evidence following from equilibrium search models with wage posting, see van den Berg (1999) and Eckstein and van den Berg (2007).
- 16.
One has to stress, however, that Postel-Vinay and Robin’s (2002b) model differs in some respects from the type of models considered so far: It does not employ random matching as matching technology, it incorporates both different able workers and differences in opportunity costs of employment among them, and it allows for counteroffers of employers in response to outside offers made to their employees.
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Hirsch, B. (2010). A General Equilibrium Model of Dynamic Monopsony. In: Monopsonistic Labour Markets and the Gender Pay Gap. Lecture Notes in Economics and Mathematical Systems, vol 639. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-10409-1_8
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