DIRECTED SEARCH ON THE JOB AND THE WAGE LADDER*

doi:10.1111/j.1468-2354.2006.00392.x

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Wiley InterScience

International Economic Review

Volume 47 Issue 2, Pages 651 - 699

Published Online: 11 Apr 2006

Published on behalf of the University of Pennsylvania and Osaka University

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DIRECTED SEARCH ON THE JOB AND THE WAGE LADDER*

Alain Delacroix ^† Shouyong Shi ^†,1

†Département des sciences économiques, Université du Québec à Montréal, Canada; Department of Economics, University of Toronto, Canada

* Manuscript received November 2003; revised July 2004.

¹ We would like to thank Dale Mortensen, Rob Shimer, and Audra Bowlus for comments. We also received useful comments from the participants of Minnesota Summer Workshop on Macroeconomic Theory (Minneapolis, 2002), National Bureau of Economic Research Summer Workshop (Cambridge, 2002), Canadian Theory Meeting (Toronto, 2002), Midwest Theory Meeting (Notre Dame, 2002), Midwest Macro Meeting (Chicago, 2003), the workshops at Northwestern University (2002), Purdue University (2002), and Queen's University (2003). Shi would like to acknowledge the Bank of Canada Fellowship and the Social Sciences and Humanities Research Council of Canada for financial support. The view expressed in this article is the authors' own and does not reflect the opinion of the Bank of Canada. All errors are ours alone. Please address correspondence to: S. Shi, Department of Economics, University of Toronto, 150 St. George Street, Toronto, Ontario, Canada, M5S 3G7. Phone: 416-978-4978. Fax: 416-978-6713. E-mail: shouyong@economics.utoronto.ca.

ABSTRACT

We model a labor market where employed workers search on the job and firms direct workers' search using wage offers and employment probabilities. Applicants observe all offers and face a trade-off between wage and employment probability. There is wage dispersion among workers, even though all workers and jobs are homogeneous. Equilibrium wages form a ladder, as workers optimally choose to climb the ladder one rung at a time. This is because low-wage applicants are relatively more sensitive to employment probability than to wage and thus forgo the opportunity to apply for a high wage, with a lower chance of success.

Received: 2003; First Revision: 2004;

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-2354.2006.00392.x About DOI