Observable worker characteristics that are supposed to account for differences between worker productivities explain only about 30% of the variation in wages. The remaining 70% could be accounted for by unobservable worker characteristics. Systematic differences in wages like the persistence of inter-industry wage differentials over time and their similarity across countries, the firm-size wage effect and the change of the wage distribution over time after accounting for observable worker characteristics suggest that similar workers are paid differently. The importance of the average employer effect in explaining these systematic differences indicate that firms have some scope to set a particular wage policy. As manifold as worker pay policies can be, so are the different wage formation assumptions used in different theories. The use of different wage policies also suggests that workers cannot easily move between employers and compare wage offers. These mobility frictions have many different sources. Search theory provides a foundation for these phenomena and is able to explain many feature in the labor market the competitive labor market model cannot explain.
Title: The Role of Skill Groups and the Production Function for the Shape of the Wage Distribution
Abstract: This chapter extends the Burdett-Mortensen model of on-the-job search by introducing different skill groups and links them via a general production function. Depending on the degree of homogeneity of the production function the model generates a log-normal-shaped wage earnings distribution. The extended model provides a method of estimating technological substitution elasticities between the different skill groups.
Title: On-the-Job Search and Asymmetric Information in the Labor Market
Abstract: This chapter focuses on the asymmetric information that exists between the current employer and the outside market regarding a worker’s productivity. The model shows that for severe enough search frictions, a market for employed workers with wage gains emerges despite the presence of adverse selection. Asymmetric information about a worker’s productivity between the worker’s current employer and the outside market enables the current employer to keep its best employees from joining the outside market by promoting them or by making them counter offers. Since outside wage offers are uncertain, firms promote or make counter offers only to their best workers. The resulting adverse selection, though, leads to an initial breakdown of the market for employed workers. As low-productivity workers are laid off over time, tenure serves as a positive signal about a worker’s productivity. After enough badly performing workers were laid off, the signal is strong enough to counteract the negative effect of adverse selection and a market for employed workers emerges.
Title: Credit Constraints, Promotion and Firm Financed General Training
Abstract: This chapter investigates firm-financed general training in a Pissarides matching framework. It assumes that workers of different skills search in skill segmented markets. It shows that it is more expensive for firms to hire high skilled workers than low skilled workers, which provides an incentive for firms to provide some training for unskilled workers. In addition firms want to reduce turnover of the newly trained worker and promote workers as soon as possible to take away their incentive to search for an outside job. Thus, training firms demand a lump-sum payment equivalent to the value of the promotion from workers that are not credit constrained and promote them immediately. Credit constrained workers are paid a trainee wage of zero and promoted only with some probability making them indifferent between staying unskilled and being trained. Only if labor mobility is very high and workers are credit constrained, then workers will gain from training.
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