Wage Bargaining with On-the-Job Search: Theory and Evidence

Abstract

The Nash wage bargaining model is ubiquitous in modern labour economics. Yet most applications of this model ignore inter-employer competition for labour services and attribute all of the workers' rent to their bargaining power. In this Paper, we write and estimate an equilibrium model with strategic wage bargaining and on-the-job search and use it to take another look at the determinants of wages in France. There are three essential determinants of wages in our model: productivity, competition between employers resulting from on-the-job search, and the workers' bargaining power. We find that between-firm competition matters a lot in the determination of wages, as it is quantitatively more important than wage bargaining a la Nash in raising wages above the workers' 'reservation wages', defined as out-of-work income. In particular, we detect no significant bargaining power for intermediate- and low-skilled workers, and a modestly positive bargaining power for high-skilled workers. In addition, the Paper provides some empirical information on the nature of sorting of workers by firms.

Keywords: Search frictions, structural estimation, wage bargaining, labour market competition

JEL Classification: J31, J41, J64