Seminar 3 February 2014

Wage Bargaining as a Social Interaction Problem: An Application to Germany

Abstract
This paper examines the importance of workers' outside options in wage determination. In a model of search and bargaining, holding the marginal product constant, a worker's wage is determined by a weighted average of wages in alternate jobs, turning wage formation into a social interaction problem. I develop a search and bargaining model with heterogeneous workers and propose novel strategies to identify the importance of this network structure in the formation of wages. Specifically, I explore differences in the mobility costs of workers as an additional source of variation for identification. Using a unique administrative panel database for Germany, I find that a 1% increase in the outside options of a worker generates a 0.7% wage increase. In addition, my results suggest that differences in workers' mobility generate asymmetric wage externalities across occupations and industries and play an important role in the transmission of a labor demand shock on a worker's wage.

JEL classification numbers: J30, J31, J60, J62
Keywords: wages, search, bargaining, sectoral and occupational mobility, social interaction.

Contact: Chandler Lutz