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Working paper 597

Kevin Fawcett and Shouyong Shi, "Learning, On-the-Job Search and Wage-Tenure Contracts", 2018-03-09
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Abstract: When workers have incomplete information about their ability, they can learn about this ability by searching for jobs, both while employed and unemployed. Search outcomes yield information for updating the belief about the ability which affects optimal search decisions in the future. Firms respond to updated beliefs by altering vacancy creation and optimal wage contracts. To study equilibrium interactions between learning and search, this paper integrates learning into a search equilibrium with on-the-job search and wage-tenure contracts. The model generates results that shed light on a number of empirical facts, such as wage cuts in job-to-job transition, wage growth over tenure, true duration dependence of unemployment, and frictional wage inequality. We calibrate the model to quantify the extent to which learning and on-the-job search explain these empirical facts.

Keywords: Learning; On-the-job search; Contracts; Inequality

JEL Classification: E21; E24; J60