Fixed or Flexible?: Wage Setting in Search Equilibrium

Abstract

Why do some vacancies offer a posted wage whereas others offer a negotiable wage? The paper endogenizes the choice of wage policy in a search model with heterogeneous workers. In particular, we characterize the circumstances under which there exist an equilibrium where all firms negotiate wages. Generally, we find that a tight labor market favors bargaining over posting, as does large worker heterogeneity. In the equilibrium of our model, labor markets are tighter when workers are more productive, suggesting a reason why wages are more often negotiated for highly paid jobs.