AN EMPIRICAL EQUILIBRIUM SEARCH MODEL OF THE LABOR-MARKET

In structural empirical models of labor market search, the distributio n of wage offers is usually assumed to be exogenous. However, because in setting their wages profit-maximizing firms should consider the res ervation wages of job seekers, the wage offer distribution is essentia lly endogenous. We investigate whether a proposed equilibrium search m odel, in which the wage offer distribution is endogenous, is able to d escribe observed labor market histories. We find that the distribution s of job and unemployment spells are consistent with the data, and tha t the qualitative predictions of the model for the wages set by employ ers are confirmed by wage regressions. The model is estimated using pa nel data on unemployed and employed individuals. We distinguish betwee n separate segments of the labor market, and we show that productivity heterogeneity is important to obtain an acceptable fit to the data. T he results are used to estimate the degree of monopsony power of firms . Further, the effects of changes in the mandatory minimum wage are ex amined.