Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment

Melvyn Coles and Dale Mortensen

No 5900, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model. Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.

Keywords: wage dispersion; wage setting; rank-preserving equilibrium (search for similar items in EconPapers)
JEL-codes: D21 D49 E23 J42 J64 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2011-08
New Economics Papers: this item is included in nep-dge, nep-lab, nep-lma and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://docs.iza.org/dp5900.pdf (application/pdf)

Related works:
Working Paper: Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp5900

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().