Wage Setting Under Targeted Search

RePEc Short ID: pre260
ORCID iD: 0000-0002-1481-051X

Cheremukhin, Anton A.; Restrepo-Echavarria, Paulina

doi:10.20955/wp.2020.041

Working Paper Revision

Wage Setting Under Targeted Search

Abstract: When setting initial compensation, some firms set a fixed, non-negotiable wage while others bargain. In this paper we propose a parsimonious search and matching model with two sided heterogeneity, where the choice of wage-setting protocol, wages, search intensity, and degree of randomness in matching are endogenous. We find that posting and bargaining coexist as wage-setting protocols if there is sufficient heterogeneity in match quality, search costs, or market tightness and that labor market tightness and relative costs of search play a key role in the optimal choice of the wage-setting mechanism. Finally, we show that bargaining prevalence is positively correlated with wages, residual wage dispersion, and labor market tightness, both in the model and in the data.

Keywords: Wage bargaining; wage posting; wage dispersion;

JEL Classification: E24; J3; J41;

https://doi.org/10.20955/wp.2020.041