The effect of search frictions on wages

Summary of Working paper 2003:12

Labor market theories allowing for search frictions make marked predictions on the e ffect of the degree of frictions on wages. Often, the e ffect is predicted to be negative. Despite the popularity of these theories, this has never been tested. We perform tests with matched worker fi rm data. The worker data are informative on individual wages and labor market transitions, and this allows for estimation of the degree of search frictions. The firm data are informative on labor productivity. The matched data provide the skill composition in diff erent markets. Together this allows us to investigate how the mean di fference between labor productivity and wages in a market depends on the degree of frictions and other determinants. We correct for worker self-selection into high-wage jobs. Using within-market variation, we also investigate the extent of (and explanations for) positive assortative matching.

Keywords: labor market imperfections, job durations, productivity, heterogeneity, sorting, assortative matching.