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Wage Rigidity and Labor Market Dynamics with Sorting

Author

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  • Bastian Schulz
Abstract
This paper adds two-sided ex-ante heterogeneity and a production technology inducing sorting to the canonical Diamond-Mortensen-Pissarides (DMP) search and matching model. Ex-ante heterogeneity and sorting have important implications for the dynamic properties of the model. The modifications solve the problem that standard DMP models do not generate enough volatility in response to shocks, also known as the “Shimer Puzzle” (Shimer, 2005). Amplification to overcome the volatility puzzle stems from an endogenously generated wage rigidity, which is of reasonable magnitude given empirical evidence from the U.S. labor market. Additionally, endogenous matching sets fluctuate in response to shocks and amplify job-creation. Using a standard Nash sharing rule, I show that the surplus function of the model, which depends on both workers' and firms' outside options, exhibits an asymmetry in equilibrium that stems from unequal bargaining powers. Using the standard calibration of the model, the firms' matching sets are wider in equilibrium than the workers' matching sets and fluctuate more in response to shocks.

Suggested Citation

  • Bastian Schulz, 2015. "Wage Rigidity and Labor Market Dynamics with Sorting," ifo Working Paper Series 199, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:ifowps:_199
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    File URL: https://www.ifo.de/DocDL/IfoWorkingPaper-199.pdf
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    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
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    6. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
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    11. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
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    14. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 556, European Central Bank.
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    Cited by:

    1. Angerer, Silvia & Glätzle-Rützler, Daniela & Lergetporer, Philipp & Sutter, Matthias, 2016. "Cooperation and discrimination within and across language borders: Evidence from children in a bilingual city," European Economic Review, Elsevier, vol. 90(C), pages 254-264.
    2. Benjamin Lochner & Bastian Schulz, 2016. "Labor Market Sorting in Germany," CESifo Working Paper Series 6066, CESifo.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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