Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Tore Ellingsen () and Åsa Rosén ()
Additional contact information
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Åsa Rosén: Dept. of Economics, Uppsala University, Postal: P.O. Box 513, S-15 120 Uppsala, Sweden

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

JEL-codes: J31; J41

22 pages, August 19, 1997

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