Labor Force Participation and Pair-wise Efficient Contracts with Search and Bargaining

David Fuller and Bryan Engelhardt

No 12005, Working Papers from Concordia University, Department of Economics

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)
Pages: 41 pages
Date: 2010-09-20, Revised 2012-01-20
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Labor force participation and pair-wise efficient contracts with search and bargaining (2012)
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