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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 185:
Fixed or Flexible? Wage Setting in Search Equilibrium

Tore Ellingsen () and ┼sa RosÚn ()

Abstract: Why do some vacancies offer a posted wage whereas others offer a negotiable wage? The paper endogenizes the choice of wage policy in a search model with heterogeneous workers. In particular, we characterize the circumstances under which there exist an equilibrium where all firms negotiate wages. Generally, we find that a tight labor market favors bargaining over posting, as does large worker heterogeneity. In the equilibrium of our model, labor markets are tighter when workers are more productive, suggesting a reason why wages are more often negotiated for highly paid jobs.

Keywords: Search; wage offers; bargaining; posting; (follow links to similar papers)

JEL-Codes: J31; J41; (follow links to similar papers)

22 pages, August 19, 1997

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