Private Information, Wage Stickiness, and Labor Market Fluctuations
13 Pages Posted: 27 Nov 2013 Last revised: 6 Jun 2017
Date Written: June 4, 2017
This paper develops a tractable job search model with information friction to analyze the underlying link between the performance-based compensation scheme and labor market fluctuations. Workers privately learn their match quality upon starting the job and keep searching for better paying jobs. Firms post performance-based wage schedules to encourage production. In contrast to the standard search and matching model with Nash-Bargaining sharing rule, this paper demonstrates that as reflecting internal pressure (incentive provision) as well as external pressure (market fluctuation), wages become sticky, which amplifies fluctuations in unemployment and vacancies.
Keywords: private information, wage stickiness, labor market fluctuations
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