We construct and estimate an equilibrium search model with on-the-job-search. Firms make take-it-or-leave-it wage offers to workers conditional on their characteristics and they can respond to the outside job offers received by their employees. Unobserved worker productive heterogeneity is introduced in the form of cross-worker differences in a “competence” parameter. On the other side of the market, firms also are heterogeneous with respect to their marginal productivity of labor. The model delivers a theory of steady-state wage dispersion driven by heterogenous worker abilities and firm productivities, as well as by matching frictions. The structural model is estimated using matched employer and employee French panel data. The exogenous distributions of worker and firm heterogeneity components are non parametrically estimated. We use this structural estimation to provide a decomposition of cross-employee wage variance. We find that the share of the cross-sectional wage variance that is explained by person effects varies across skill groups. Specifically, this share lies close to 40 % for high-skilled white collars, and quickly decreases to 0 % as the observed skill level decreases. The contribution of market imperfections to wage dispersion is typically around 50%.

This paper investigates the conditions under which firms are willing to invest in the general human capital of their workers. We show that a key ingredient is the presence of labor market imperfections which distort the wage structure. In particular, firms will invest in training if the gap between productivity and wages is larger for more skilled workers. We outline a number of specific mechanisms which lead to a distorted equilibrium wage structure, and thus induce rms to invest in worker training. The predictions of our model differ from the standard Beckerian analysis of general human capital. We argue that a model with imperfect labor markets is more consistent with the empirical evidence on the financing of general training.

This paper argues that a risk-averse worker’s after-tax reservation wage encodes all the relevant information about her welfare. This insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits. Some existing estimates imply significant gains to raising the current level of unemployment insurance but highlight the need for more research on the determinants of reservation wages. Our approach is intuitive and complements those based on Baily’s (1978) test. Some advantages of our test are that it uses less of the structure of the model, it is entirely behavioral and does not require separate risk-aversion estimates, and it is robust to various extensions including worker heterogeneity. Shimer’s research is supported by a grant from the National Science Foundation. Werning is grateful for the hospitality of the Federal Reserve Bank of Minneapolis and Harvard University. We are grateful to The goal of this paper is to develop a test for the optimal level of unemployment insurance

In Becker's (1973) neoclassical marriage market model, matching is positively assortative if types are complements: i.e. match output f(x, y) is supermodular in x and y. We reprise this famous result assuming time-intensive partner search and transferable output. We prove existence of a search equilibrium with a continuum of types, and then characterize matching. After showing that Becker's conditions on match output no longer suffice for assortative matching, we find sufficient conditions valid for any search frictions and type distribution: supermodularity not only of output f , but also of log f x and log f xy . Symmetric submodularity conditions imply negatively assortative matching. Examples show these conditions are necessary.

We survey the literature on search-theoretic models of the labor market. We show how this approach addresses many issues, including the following: Why do workers sometimes choose to remain unemployed? What determines the lengths of employment and unemployment spells? How can there simultaneously exist unemployed workers and unfilled vacancies? What determines aggregate unemployment and vacancies? How can homogeneous workers earn different wages? What are the tradeoffs firms face from different wages? How do wages and turnover interact? What determines efficient turnover? We discuss various modeling choices concerning wage determination and the meeting process, including recent models of directed search.

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A natural holdup problem arises in a market with search frictions: firms have to make a range of investments before finding their employees and larger investments translate into higher wages. In particular, when wages are determined by ex post bargaining, the equilibrium is always ine#cient: recognizing that capital intensive production relations have to pay higher wages, firms reduce their investments. This can only be prevented by removing all the bargaining power from the workers, but this in turn depresses wages below their social product, and creates excessive entry of firms. In contrast to this benchmark, we show that e#ciency is achieved when firms post wages and workers can direct their search towards more attractive o#ers. This e#ciency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage o#ers. We show that the underlying reason for e#ciency is not wage posting per se, but the ability of workers to direct their search towards more capital intensive jobs. Keywords: E#ciency, Holdup, Search, Wage Posting. JEL Classification: 83 # We thank two anonymous referees, Jonathan Levin, and seminar participants at MIT, NBER and Society for Economic Dynamics Conference. 1

A hallmark of modern labor economics is the close interplay between the development of theory, data sources and econometric testing. The evolution of the economic analysis of unemployment insurance provides a good illustration. New theoretical approaches, in particular job-search theory, have inspired a large amount of empirical research, some of it methodologically innovative and most of it highly relevant for economic policy. The paper presents a broad survey and an assessment of the economic analysis of unemployment insurance as it has evolved since the 1970s. JEL-classification: H21, J65, D8. Keywords: Unemployment insurance, unemployment, job search, wage determination. * The paper was prepared for the Scandinavian Journal of Economics 100th anniversary symposium on Public Policy and Economic Theory, Lysebo, Oslo, January 31 - February 2, 1997. I have received useful comments from Anders Bjrklund, Per-Anders Edin, Peter Fredriksson, Nils Gottfries, Ann-Sofie Kolm, Alan Manning, J...

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