Strategic Wage Setting and Coordination Frictions with Multiple Applications
Pieter A. Gautier
Free University of Amsterdam; Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)
José Luis Moraga-González
University of Navarra, IESE Business School; University of Groningen
Tinbergen Institute Discussion Paper No. 04-063/1; IZA Discussion Paper No. 1260; CESifo Working Paper Series No. 1304
We examine wage competition in a model where identical workers choose the number of jobs to apply for and identical firms simultaneously post a wage. The Nash equilibrium of this game exhibits the following properties: (i) an equilibrium where workers apply for just one job exhibits unemployment and absence of wage dispersion; (ii) an equilibrium where workers apply for two or for more (but not for all) jobs always exhibits wage dispersion and, typically, unemployment; (iii) the equilibrium wage distribution with a higher vacancy-to-unemployment ratio first-order stochastically dominates the wage distribution with a lower level of labor market tightness; (iv) the average wage is non-monotonic in the number of applications; (v) the equilibrium number of applications is non-monotonic in the vacancy-to-unemployment ratio; (vi) a minimum wage increase can be welfare-improving because it compresses the wage distribution and reduces the congestion effects caused by the socially excessive number of applications; and (vii) the only way to obtain efficiency is to impose a mandatory wage that eliminates wage dispersion altogether.
Number of Pages in PDF File: 51
Keywords: Search, wage setting, coordination frictions, wage dispersion,coordination frictions, internet, job search, minimum wage
JEL Classification: D62, D83, J23, J41, J64, D4working papers series
Date posted: August 23, 2004
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