DP5229 How Large are Search Frictions?

Author(s): Pieter A. Gautier, Coen N Teulings
Publication Date: October 2005
Keyword(s): assignment, search, wage differentials
JEL(s): J210, J230, J300
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5229

This paper shows that we can normalize job and worker characteristics such that without frictions there exists a linear relationship between wages on the one hand and worker and job type indices on the other. However, for five European countries and the US we find strong evidence for a systematic concave relation. An assignment model with search frictions provides a parsimonious explanation for our findings. This model yields two restrictions on the coefficients that fit the data well. Allowing for unobserved heterogeneity and measurement error we find that reservation wages are 25% lower than they would be in a frictionless world. Our results relate to the literature on industry wage differentials and on structural identification in hedonic models.