Labour Markets
Multiple applications

Many models of wage bargaining between a firm and a job applicant neglect the cases where there are several suitable applicants or job offers. In Discussion Paper No. 938, Melvyn Coles and Abhinay Muthoo develop a microeconomic model of job matching in which firms advertise vacancies in local newspapers or post them in job centres. Reservation prices are determined endogenously and the negotiated wage depends explicitly on whether either party holds such outside options. Workers' reservation wages fall as the number of competing job seekers increases but rise with the arrival rate of new vacancies. The reservation wage of a firm with an advertised vacancy rises with the number of competing vacancies but falls with a rise in the flow of workers into unemployment. Wages are therefore sensitive to labour market conditions and move in the expected direction but not sufficiently to clear the market.

If a firm advertising a vacancy is `lucky', a suitable job seeker in the unemployment pool will apply for the job; if it is `very lucky', there will be several applicants and it can negotiate the reservation wage of one of them. If the firm is `unlucky', however, the vacancy may be left on the books of the job centre or readvertised, in the hope that a new entrant to the unemployment pool will be suitable. Similarly, newly unemployed workers will always face a stock of vacancies and will re-enter employment immediately if one (or more) is suitable but must wait for new vacancies to be advertised when none is available. Coles and Muthoo demonstrate unambiguously that `new' vacancies (or newly unemployed workers) fare better than those that have already sampled the market and found no suitable workers (or jobs). There are also increasing returns to matching: as the arrival rates of new unemployed workers and vacancies increase, all agents can expect to become better off.

Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium
Melvyn G Coles and Abhinay Muthoo

Discussion Paper No. 938, April 1994 (HR)