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Wage Posting and Business Cycles

Moscarini, G; Postel-Vinay, F; (2016) Wage Posting and Business Cycles. In: American Economic Review: Papers & Proceedings 2016. (pp. pp. 208-213). American Economic Association: California, USA. Green open access

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Abstract

The canonical framework of Burdett and Mortensen (1998) derives wage dispersion as the unique equilibrium outcome in a stationary environment with meeting frictions and random search. Firms derive monopsony power from search frictions and commit to wage offers. Workers earn rents: wages are not compressed to the opportunity cost of work, owing to the ability of employed workers to receive additional offers and quit directly from one job into another, without experiencing unemployment. In previous work (Moscarini and Postel-Vinay 2016), we explored the implications of this job ladder for the aggregate dynamics of unemployment, wages, and the firm size distribution at business cycle frequencies. The model establishes a natural connection between the average wage growth in the economy and the pace of Employer-to-Employer (EE) transitions, through two channels. First, a composition effect: workers typically quit a job when they receive a better offer, hence the faster these transitions the higher the pace of reallocation toward high wages, and the higher average wage growth. Second, a strategic effect: the more opportunities workers have to quit, the more aggressive are their employers with their wage responses, to try and retain them. The first effect benefits only job movers, the second both movers and stayers. Therefore, we expect wage growth to be positively related to the pace of EE reallocation for all workers, but especially for movers. We verify this empirically with longitudinal micro data from the Survey of Income and Program Participation (SIPP).

Type: Proceedings paper
Title: Wage Posting and Business Cycles
Event: 128th Annual Meeting of the American Economic Association
Location: San Francisco, CA
Dates: January 2016
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/aer.p20161051
Publisher version: http://dx.doi.org/10.1257/aer.p20161051
Language: English
Additional information: Copyright © American Economic Association. Reproduced with permission of the American Economic Review.
UCL classification: UCL > School of Arts and Social Sciences
URI: http://discovery.ucl.ac.uk/id/eprint/1517895
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