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Wages, Heterogeneities, and Labor Market Dynamics

Summary

Search frictions generate long-term employment relationships and thus rents for matched workers and firms, which are shared in the wage determination process. An understanding for wage formation and wage cyclicality is central for a variety of issues (e.g. hiring and firing decisions, labor market dynamics, wage dispersion) and therefore ultimately for policy (e.g. labor market, business cycle or trade policies). Although empirical research on wage cyclicality has been spurred in light of the search and matching theory recently, the existing literature suffers from data limitations (e.g. the inability to control for certain heterogeneities or the lack of disaggregated labor market flow data).
As our major contribution, we will first analyze the driving forces of wage formation, and wage cyclicality as well as the role of various heterogeneities. Second, the project aims to establish a quantitative connection between wage formation and labor market flow dynamics at the disaggregated level. Two examples: How do the labor market dynamics of rigid wage establishments differ from flexible wage establishments? What is the relationship between sectoral- or establishment-specific average turnover rate and establishment labor market dynamics? Answers to those questions require high quality disaggregated labor market flow and wage data. They will be a reference point for the validity of various labor market flow models and they will help us to improve our understanding on the interaction between wage formation and labor market dynamics.

Principal Investigators

Prof. Dr. Christian Merkl (University of Erlangen-Nuremberg)
Dr. Heiko Stüber (University of Erlangen-Nuremberg)

International and National Cooperation Partner

Prof. Mike Elsby, PhD (University of Edinburgh)
Prof. Andy Snell, PhD (University of Edinburgh)
Prof. Jonathan Thomas, PhD (University of Edinburgh)