Bilateral Search as an Explanation for Labor Market Segmentation and Other Anomalies
35 Pages Posted: 28 Dec 2006 Last revised: 13 Sep 2010
Date Written: September 1993
Since applying for jobs is costly, workers prefer applying where their employment probability is high and, therefore, to jobs attracting fewer higher quality applicants. Since creating vacancies is expensive, firms create more vacancies when job-seeking is high. Our model captures these ideas and accounts for worker heterogeneity by assuming three types of nearly identical workers. These infinitesimal quality differences generate a discrete wage distribution. For some parameter values lower quality workers have discretely lower wages and higher unemployment than better workers. Moreover, increasing the number of the lowest quality workers can make all workers better off.
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