Competitive Search: A Test of Direction and Efficiency
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1 Bryan Engelhardt 1 Peter Rupert 2 1 College of the Holy Cross 2 University of California, Santa Barbara November 20, / 26
2 Introduction Search & Matching: Important framework for labor market analysis Equilibrium unemployment Wage dispersion Key properties of competitive search from Moen(1997) (1) Sub-markets: Workers search in markets with different wages (2) Direction: Workers wait longer for higher wages (3) Posting: Firms choose and commit to paying a wage 2 / 26
3 Questions (1) Do the competitive search restrictions hold? (2) What are the implications for the search literature? 3 / 26
4 Overview of Tests and Findings Competitive search assumes several conditions (1) Sub-markets - job finding rates and wage pairs (2) Direction - higher wages lower job finding rate (3) Posting - Surplus is split efficiently, i.e., Hosios (1990) Findings (1) Sub-markets - fail to reject in all industries (2) Direction - fail to reject in all industries (3) Efficiency - reject in three of six industries 4 / 26
5 Time is continuous Workers: Firms: Model Homogeneous, risk neutral and discount at rate r Employed (E) or unemployed (U) Unemployment utility flow: z Poisson job arrival rate: p(θ i ), θ V U Free-entry of firms, risk neutral and discount at rate r Firm is vacant (V) or filled (J) Vacancy costs: γ Job filling rate: q(θ i ) Fixed cost to draw a productivity y 1,..., y n with probability f 1,..., f n Idiosyncratic job destruction at rate s 5 / 26
6 Flow Bellman Equations Workers ru i = z + p(θ i )(E i U i ) re i = w i s(e i U i ) Firms rv (y i, w, θ) = γ + q(θ)[j(y i, w) V (y i, w, θ)] rj(y i, w) = y i w sj(y i, w) 6 / 26
7 Equilibrium (1) Steady-state flows and identity flow into and out of each sub-market is equal sum of the unemployed and employed equals one (2) Workers direct their search to best sub-market (3) Firms post wages that maximize profits 7 / 26
8 Key Equilibrium Conditions (1) Sub-market flows u i p(θ i ) = f i es (2) Workers indifference across sub-markets (3) Surplus splitting rule where η i = elasticity of q(θ i ) p(θ i ) = ru z (r + s) w i ru w i = η i y i + (1 η i )ru 8 / 26
9 Data Current Population Survey (March 2006) duration of unemployment in weeks - t hourly wages - w unemployment rate - u Job Openings and Labor Turnover Survey (March 2006) vacancies - v IRS - SOI on Corporate Returns - Table 7 (2006) (labor earnings) / (labor earnings + firm earnings) - π 9 / 26
10 Construction of Likelihood Function (1) Employed Observations f (w e, i) = 1 exp 1 2( w µ i σw )2, and f (w, e) = e 2π (2) Unemployed observations where p i = p(θ i ) f (t u, i) = p i exp p i t, and f (t, u) = u n i=1 n f i f (w e, i) i=1 u i f (t u, i) u 10 / 26
11 Complete Likelihood Function ln L(ψ) = j e ln(f (w j, e j )) + j u ln(f (t j, u j )) subject to e + n i=1 u i = 1, n i=1 u ip i = es, and n i=1 f i = 1 where ψ = {u 1,..., u n, p 1,..., p n, f 1,..., f n, µ 1,..., µ n, σ w, s, e} 11 / 26
12 Additional Estimators To identify the elasticity of the matching function Matching function is Cobb-Douglas: p(θ i ) = x(u i, v i )/u i = u 1 η i v η i /u i The estimator is ˆv = n v i = i=1 n i=1 p 1/η i u i, Use JOLTS data for ˆv 12 / 26
13 ...Estimators To identify posting and efficiency Wage-splitting rule is The estimator is ˆπ = w = βy + (1 β)ru n i=1 f iµ i n i=1 f iy i = β = η implies efficiency n i=1 f iµ i n i=1 f i µ, i (1 β)ru β Use IRS data for ˆπ 13 / 26
14 Identification and Estimation Likelihood and estimators identify Wages (w 1,..., w n ) that occur with probability (f 1,..., f n ) and measurement error σ w Arrival rates (p 1,..., p n ) that occur with probability (u 1,..., u n ) Elasticity parameter η Wage splitting parameter β job destruction rate s 14 / 26
15 Tests of Competitive Search Specification A - No equilibrium conditions are imposed Specification B - Sub-markets Specification C - Direction Specification D - Efficiency H o : p i u i = f i es for all i H a : p i u i f i es for one i H o : p i = (r + s) ru z w i ru H o : p i (r + s) ru z w i ru H o : η = β H a : η β for all i for one i 15 / 26
16 ...Data Education & Construction Health Services CPS data w t û JOLTS data ˆv IRS data ˆπ All Industries 16 / 26
17 Estimates: Construction Estimates 17 / 26
18 Estimates: Education & Health Services Estimates 18 / 26
19 Specification Tests Education & Construction Health Services ln L under Specification A - base -4, ,578.8 B - submarkets -4, , C - direction -4, , D - efficiency -4, , Test of submarkets (A vs. B) LR test p-value 1 1 Test of directed search (B vs. C) LR test p-value Test of efficiency (C vs. D) LR test p-value All Industries 19 / 26
20 Conclusions & Future Avenues Current Conclusions Fail to reject submarkets and workers direct search Reject efficiency in a subset of industries Future additions Alternative matching functions Estimation by occupations, education, etc. Use of panel data (NLSY or matched CPS) 20 / 26
21 Complete Descriptive Statistics Aggregate Construction Manufacturing Trade, Transportation, & Utilities Professional & Business Services Education & Health Services Leisure & Hospitality CPS data w (12.12) (9.91) (12.09) (10.61) (15.33) (11.68) (9) t (21.79) (16.33) (23.91) (21.99) (22.74) (24.73) (20.6) û JOLTS data ˆv IRS data ˆπ Note: Standard deviations are in parenthesis, unemployment duration is weekly, wages are hourly. Back to the data 21 / 26
22 Parameter Estimates: Construction Table: Specification C Markets i = 1 i = 2 i = 3 i = 4 i = 5 i = 6 i = 7 i = 8 u i /u p i f i µ i Other Estimates σ w β η s ru z Table: Specification D Markets i = 1 i = 2 i = 3 i = 4 i = 5 i = 6 i = 7 i = 8 u i /u p i f i µ i Other Estimates σ w η = β s ru z Back to Figures 22 / 26
23 Parameter Estimates: Education & Health Services Table: Specification C Markets i = 1 i = 2 i = 3 i = 4 i = 5 i = 6 i = 7 i = 8 u i /u p i f i µ i Other Estimates σ w β η s ru z Table: Specification D Markets i = 1 i = 2 i = 3 i = 4 i = 5 i = 6 i = 7 i = 8 u i /u p i f i µ i Other Estimates σ w η = β s ru z Back to Figures 23 / 26
24 Complete Specification Tests Aggregate Construction Manufacturing Trade, Transportation, & Utilities Professional & Business Services Education & Health Services Leisure & Hospitality ln L under Specification A -60, , , , , , , B -60, , , , , , , C -60, , , , , , , D -60, , , , , , , Test of submarkets (A vs. B) LR test p-value Test of Homogeneous workers (B vs. C) LR test p-value Test of efficiency with homogeneous workers (C vs. D) LR test p-value Back to the Results 24 / 26
25 Generalized Cobb-Douglas: Au 1 η v η One approach is to assume industries have same η and A, or ˆv c = n i=1 v c i = A 1/η n (pi c ) 1/η ui c, i=1 Identification ˆv e = n i=1 v e i = A 1/η n (pi e ) 1/η ui e, i=1 Ratios solve for η Levels solve for A 25 / 26
26 Negative z with Random Matching and a Productivity Distribution Likely parameters ru = z + p ru ru = 5 p = 5, r =.05, s =.4 This implies w ru df (w) r + s z + p ( w ru) r + s if w = 7, then z = 17.2 if w = 12, then z = / 26
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