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Discrimination and job search in imperfect labour markets Watts, Martin John

Abstract

In this study the behaviour of firms and workers is modelled simultaneously in a labour market characterised by one imperfection, namely the absence of complete information on the part of job seekers about job offers and wage rates over firms. The necessary and sufficient conditions for wage dispersion in equilibrium in this model are examined. In the absence of perfect information, unemployed individuals search randomly for job offers. Since their behaviour is based on general information acquired through search, workers' turnover and acceptance behaviour is stochastic. Firms make wage offer and vacancy creation decisions, based on their current level of employment ,to maximise profits over an infinite horizon. Firms enjoy intertemporal monopsony power. Equilibrium in this market is stochastic. It is characterised by wage and employment dispersion and the simultaneous existence of frictional unemployment and vacancies. The level of vacancy creation is not consistent with static profit maximisation. Such vacancies are defined as speculative. They do not represent desired net hires. Firms are speculating on the basis of individuals' stochastic turnover and acceptance behaviour. The aggregate measure of vacancy creation represents job offers at different wage rates. Excess demand, as conventionally defined, does not exist. In this study the concept of a vacancy and the construction of an index of market pressure are examined under different market structures. Comparative static predictions are generated in this model, Model I. The main contribution of this study is in the formulation of models of imperfect markets in which there are two types of worker who differ systematically in their labour market behaviour. Type one individuals have a higher probability of quitting, if employed, in response to a particular wage offer than type two individuals. To a firm, type two individuals are more valuable because, in response to a stream of wage offers over time, the mean returns associated with hiring a type two individual exceed the returns associated with hiring a type one individual. Two labour-market structures are considered. In Model II, firms are unable to discriminate explicitly in wage offer and hiring between individuals. The important result is that, although firms behave competitively, inter-firm wage differentials are observed. Firms make decisions based on their current levels and compositions of employment. Type one individuals, although less valuable, earn a higher mean wage offer than type two individuals. By contrast, in Model III firms can discriminate explicitly between individuals in hiring and wage offer. Now firms make offers directly related to the individual's value to the firm and intra-firm wage differentials are observed. Comparative static predictions are derived with respect to both models. Within this framework, the arguments of economists, as to whether low turnover workers earn a higher or lower wage than high turnover workers, are evaluated. Furthermore, the impact of fair employment laws on this labour market are examined. Excess demand, as conventionally defined, does not exist in these models. Vacancies do not represent desired net hires and so a measure of market pressure based on aggregate vacancies and frictional unemployment is incorrect. This important result from the models demonstrates the inadequacy of using vacancy and unemployment data to draw inferences about excess supply or demand in a labour market. A crude measure of market pressure based on ex post hires and quits is developed and its inadequacies outlined.

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