Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Job Search with Bidder Memories

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Job Search with Bidder Memories

Article excerpt

Working Paper 2009-28

October 2009

Abstract: This paper revisits the no-recall assumption in job search models with take-it-or-leave-it offers. Workers who can recall previously encountered potential employers in order to engage them in Bertrand bidding have a distinct advantage over workers without such attachments. Firms account for this difference when hiring a worker. When a worker first meets a firm, the firm offers the worker a sufficient share of the match rents to avoid a bidding war in the future. The pair share the gains to trade. In this case, the Diamond paradox no longer holds.

JEL classification: J24, J42, J64

Key words: job search, recall, wage determination, Diamond paradox

1. Introduction

This paper analyzes the role of recall in job search. When a worker meets a potential employer, a wage offer from the firm is a bid for the worker's services in an auction. If workers have memories that allow them to recall previous encounters with potential employers, these workers have the capacity to alter the number of bidders for their services, induce Bertrand bidding and thereby obtain high wages. Without a recall option in bilateral matching, firms are monopsonists. As Diamond (1971) illustrates, these firms offer low wages that capture the gains to trade.

The standard search model plays down the recall option and focuses on the single bidder outcome. In this literature (e.g. McCall, 1970; Mortensen, 1970; Albrecht and Axell, 1984), if traders fail to agree to terms, they break-up, the match dissolves entirely, and potential trading partners lose all contact. They forget the match existed. As Rogerson, Shimer and Wright (2005) point out, the no-recall assumption is innocuous given that previous bids are fixed. In a stationary world, rejected offers do not become acceptable when viewed a second time around.

This argument assumes that firms will not revise their wage offer when called upon again, possibly in different, circumstances. Recalled bidders, however, have an incentive to update their offers to account for the competition for the worker. (1) When there are no competing bidders, the firm finds it optimal to offer the worker's reservation wage, i.e. the wage that makes the worker indifferent between accepting and rejecting the job. In contrast, when there are competing bidders, the firm finds it optimal to offer a wage slightly higher than those offered by the other bidders. As a result, when there are competing bidders, every firm offers its own reservation wage, i.e. the wage that makes the firm indifferent between hiring and not hiring the worker. (2)

When firms are able to update their wage offers, the possibility of recall fundamentally alters the equilibrium of the economy. Without recall, it is well understood (see Diamond, 1971; Burdett and Judd, 1983; Albrecht and Axel, 1984) that every employed worker earns the monopsony wage, no matter how small the search frictions are. With recall, forward looking firms avoid a future bidding war by offering enough at the initial encounter. A worker continuing with job search has a chance of generating a wage that is strictly greater than the monopsony wage, so the incumbent firm must offer the worker a fraction of the gains from trade to make him take the job. With recall, every employed worker earns a wage strictly greater than the monopsony wage. Moreover, this wage converges to the competitive wage as the search frictions become arbitrarily small. (3)

The intuition is straightforward. When a firm is the sole bidder for a worker, it offers a wage that makes the worker indifferent between becoming employed and continuing to search. If the worker continues to search, he may find a second bidder and engage the two firms in a bidding war. In order to convince the worker to forgo the option of searching, the firm has to offer a wage that is higher than the monopsony wage even when the firm is the sole bidder. …

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