Search Efficiency, Wage Dynamics and Welfare
48 Pages Posted: 6 Dec 2013 Last revised: 2 Feb 2019
Date Written: January 12, 2019
Abstract
We study the role of search efficiency on wage dynamics and welfare. There are two sectors in the economy: a risk-free sector that employs workers only, and a risky sector with matching frictions that employs both workers and employers. Workers are risk-averse, whereas employers are risk-neutral. In the risky sector, contracts are incomplete; hence self-enforcing contracts are the only means to share risk. We show that improvements in search efficiency in the risky sector increases the average real wage and wage volatility in that sector as well as raising the (expected) real wage and wage volatility in the whole economy. Further, while the increase in search efficiency makes workers better off, its effect on employers depends on the parameters of the model. If the welfare of employers also improves, then this is a Pareto improvement.
Keywords: Search Efficiency; Self-enforcing Contracts; Wage Volatility.
JEL Classification: E24, J31, J63, J64
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