April 2015

Wage Dispersion with Heterogeneous Wage Contracts

Cynthia L. Doniger


I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either posted wages or wage contracts contingent on outside options. Firm level costs for contingent contracts generate a separating equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations even when most firms post wages. Using German employee-level administrative data, I estimate roughly 70 percent of firms post wages and employ nearly 50 percent of workers under such contracts.

Accessible materials (.zip)

Keywords: Labor supply and demand, Market structure and pricing, Wages and compensation

DOI: http://dx.doi.org/10.17016/FEDS.2015.023

PDF: Full Paper

Back to Top
Last Update: June 19, 2020