Wage Rigidity and Labor Market Dynamics with Sorting
Bastian Schulz ()
VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association
This paper adds two-sided ex-ante heterogeneity and a production technology inducing sorting to the canonical Diamond-Mortensen-Pissarides (DMP) search and matching model. Ex-ante heterogeneity and sorting have important implications for the dynamic properties of the model. The modifications solve the problem that standard DMP models do not generate enough volatility in response to shocks, also known as the "Shimer Puzzle" (Shimer, 2005). Amplification to overcome the volatility puzzle stems from an endogenously generated wage rigidity, which is of reasonable magnitude given empirical evidence from the U.S. labor market. Additionally, endogenous matching sets fluctuate in response to shocks and amplify job-creation. Using a standard Nash sharing rule, I show that the surplus function of the model, which depends on both the workers' and the firms' outside option, exhibits an asymmetry in equilibrium that stems from unequal bargaining powers. Using the standard calibration of the model, the firms' matching sets are wider in equilibrium than the workers' matching sets and fluctuate more in response to shocks.
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: Wage Rigidity and Labor Market Dynamics with Sorting (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112932
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