Wednesday, November 6, 2013

Are wages posted or bargained?

Modeling the labor market, we tend to postulate that wages are either posted by employers or negotiated, typically by Nash bargaining. This is especially true of search and matching models, which often study business cycles. Results depend to some degree on this assumption, thus it should be a good idea to check against the empirical evidence how wages are determined in the matching process.

Hanna Brenzel, Hermann Gartner and Claus Schnabel use employer data from Germany and find that it is a mixed bag. But how wages are set in not random. To quote from their abstract:
Wage posting dominates in the public sector, in larger firms, in firms covered by collective agreements, and in part-time and fixed-term contracts. Job-seekers who are unemployed, out of the labor force or just finished their apprenticeship are also less likely to get a chance of negotiating. Wage bargaining is more likely for more-educated applicants and in jobs with special requirements as well as in tight regional labor markets.
This implies in particular that the mix may change over the business cycle (as labor-market tightness changes), and that models that assume that one must be unemployed to apply for jobs and then get Nash bargaining are inconsistent with the data, at least in Germany.

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