Labor force participation and pair-wise efficient contracts with search and bargaining

Bryan Engelhardt and David Fuller

Labour Economics, 2012, vol. 19, issue 3, 388-402

Abstract: A “constant” wage is pair-wise inefficient in a standard search model when workers endogenously separate from employment. We derive a pair-wise efficient employment contract that involves workers paying a hiring fee (or bond) upon the formation of a match. We estimate the constant wage and pair-wise efficient contract assuming the hiring fee is unobservable, and find evidence to reject the pair-wise efficient contract in favor of the constant wage rule. A counterfactual experiment reveals the current level of labor force participation to be 9.6% below the efficient level, and a structural shift to the pair-wise efficient contract improves welfare by roughly 3.5%.

Keywords: Labor supply; Unemployment; Matching; Efficiency wages (search for similar items in EconPapers)
JEL-codes: J0 J41 J64 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Labor Force Participation and Pair-wise Efficient Contracts with Search and Bargaining (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:19:y:2012:i:3:p:388-402

DOI: 10.1016/j.labeco.2012.02.001

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