Wages, Heterogeneities, and Labor Market Dynamics


Search frictions generate long-term employment relationships and rents for matched workers and firms, which are shared in the wage determination process. A good understanding of wage formation and wage cyclicality is key 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 or business cycle policies).

During the first two years of our project, we have created the new unique Administrative Wage and Labor Market Flow Panel (AWFP) dataset and we have identified many new stylized facts on wage formation, heterogeneities and labor market flow dynamics in Germany. We contrasted these stylized facts with existing theories (e.g. on-the-job search), we provided new theoretical frameworks (e.g. on different real wage cyclicalities and their feedback on establishments’ hiring behavior) and we offered statistical explanations (e.g. on returns to tenure). Our work has helped us to identify important open questions and new data requirements.

Our new project proposition aims at gaining new insights on the hiring activities of establishments and their wage formation. For this purpose, we will merge the AWFP data with the IAB Job Vacancy Survey, which contains information on vacancies, recruitment channels and intensities. We will establish new stylized facts on how different wage cyclicalities and other factors affect establishments’ search behavior and vacancy posting. We will also analyze how establishments poach workers from other establishments. The results will be contrasted with search theory. New model mechanisms will be developed and compared to the data outcomes.

Furthermore, we will use administrative worker data to analyze various biases when it comes to the statistical properties of wages and wage cyclicalities over the business cycle. We will for example develop a method to control for time-variant match-specific heterogeneity and test whether this leads to a systematic bias of estimated wage cyclicalities. The econometric results will again be contrasted with theory.

Overall, we aim at establishing new stylized facts. We expect the new stylized facts to be of interest to a broad audience of labor economists because they will for example contain insights on worker reallocation and vacancy posting behavior. In addition, we aim at advancing relevant models and mechanisms. They will allow us to interpret observed phenomena in structural manner and can be used for policy analysis.

Principal Investigators

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

International and National Cooperation Partner

Prof. Rüdiger Bachmann, PhD (University of Notre Dame)
Prof. Christian Bayer, PhD (University of Bonn)
Prof. Dr. Nicole Gürtzgen (University of Regensburg and IAB)
Stefan Seth (IAB)
Prof. Andy Snell, PhD (University of Edinburgh)
Prof. Jonathan Thomas, PhD (University of Edinburgh)
Felix Wellschmied, PhD (Universidad Carlos III de Madrid)