DP14430 On-the-job Search and the Productivity-Wage Gap

Author(s): Sushant Acharya, Shu Lin Wee
Publication Date: February 2020
Keyword(s): Labor Share, on-the-job search, Productivity-wage gap, Replacement hiring, unemployment
JEL(s): E24, J63, J64
Programme Areas: Labour Economics, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14430

We examine how worker and firm on-the-job search have differential impacts on the productivity-wage gap. While an increase in both worker and firm on-the-job search raise productivity, they have opposing effects on wages. Increased worker on-the-job search raises workers' outside options, allowing them to demand higher wages. Increased firm on-the-job search improves firms' bargaining position relative to workers' by raising job insecurity and the wedge between hiring and meeting rates. This allows firms to pass-through a smaller share of productivity to wages, enlarging the productivity-wage gap. Quantitatively, the model can account for the observed widening US productivity-wage gap over time.