Wage setting protocols and labor market conditions: Theory and evidence

Abstract

We theoretically and empirically examine how firms’ choices of wage-setting protocols respond to labor market conditions. We develop a simple model in which workers can send multiple job applications and firms choose between posting wages and Nash bargaining. Posting a wage allows the firm to commit to lower wages than would be negotiated ex-post, but eliminates the ability to respond to a competing offer, should the worker have one. The model makes predictions about the joint correlation between the application–vacancy ratio, the number of applications per worker, and the incidence of wage posting. We find empirical support for these predictions in a novel dataset from an online job board. Our theory also implies that an increase in labor market competition may manifest itself through the incidence of wage posting rather than a change in the posted wages themselves; and that labor market regulations such as pay transparency laws have redistributive equilibrium effects by disproportionately benefiting workers with few applications.