Job Search under Asymmetric Information: Endogenous Wage Dispersion and Unemployment Stigma

Job Search under Asymmetric Information: Endogenous Wage Dispersion and Unemployment Stigma

Economic Theory

Shuaizhang Feng, Lars Lefgren, Brennan C. Platt, Bingyong Zheng

Abstract

We present a model of directed job search with asymmetric information regarding worker type. While job applicants know their productivity type, firms can only observe the duration of unemployment as well as a noisy signal of worker type. Firms can offer an unscreened wage or a wage that is conditioned on passing the screening and the duration of unemployment. This framework leads to three possible equilibria which depend on model parameter values. We describe the circumstances under which each equilibrium may result and the empirical implications of each equilibrium. Our model sheds light into wage scarring, unemployment duration, wage dispersion and firm-wage sorting, as well as the effects of unemployment insurance and minimum wages on search behavior and the distribution of wages.

Keywords: Wage dispersion; Directed search; Unemployment stigma; Wage scarring

JEL classification: D82; D83; J31