How Large are Search Frictions?

Joint with: Peter A. Gautier

This paper shows that we can normalize job and worker characteristics such that without frictions there exists a linear relationship between wages on the hand and worker and job type indices on the other hand. However, for 5 European countries and the US we find strong evidence for a systematic concave relationship. An assignment model with search frictions provides a parsimonious explanation for

our findings. This model yields two restrictions on the coefficients which fit the data well. Allowing for unobserved heterogeneity and measurement error we find

that reservation wages are 25% lower than they would be in a frictionless world. Our results relate to the literature on industry wage differentials and on structural

identification in hedonic models.

For more information, contact Jere Behrman.