Wages, Heterogeneities, and Labor Market Dynamics

SPP 1764: Der deutsche Arbeitsmarkt in der Globalisierung: Herausforderungen durch Handel, Technologie und Demografie

Search frictions generate long-term employment relationships and thus rents for matched workers and firms, which are shared in the wage determination process. An understanding for wage formation and wage cyclicality is central for a variety of issues (e.g. hiring and firing decisions, labor market dynamics, wage dispersion) and therefore ultimately for policy (e.g. labor market, business cycle or trade policies). Although empirical research on wage cyclicality has been spurred in light of the search and matching theory recently, the existing literature suffers from data limitations (e.g. the inability to control for certain heterogeneities or the lack of disaggregated labor market flow data). One contribution of our project is the close collaboration with the project `Custom Shaped Administrative Data for the Analysis of Labor Markets (CADAL)´ (headed by Stefan Bender and Jörg Heining) in order to construct a high quality dataset, which circumvents the problems of the existing literature and which will be available for the scientific community. The dataset will be designed to answer state-of-the-art theory-based empirical questions. As our major contribution, we will analyze the driving forces of wage formation, and wage cyclicality as well as the role of various heterogeneities. In addition, the project aims to establish a quantitative connection between wage formation and labor market flow dynamics at the disaggregated level. Two examples: How do the labor market dynamics of rigid wage establishments differ from flexible wage establishments? What is the relationship between sectoral- or establishment-specific average turnover rate and establishment labor market dynamics? Answers to those questions require high quality disaggregated labor market flow and wage data. They will be a reference point for the validity of various labor market flow models and they will help us to improve our understanding on the interaction between wage formation and labor market dynamics.Our project is at the core of the Priority Program (Schwerpunktprogramm, SPP 1764) `The German Labour Market in a Globalised World: Challenges through Trade, Technology, and Demographics´ since we expect insights about the driving forces of wage formation and unemployment. Wage formation is key for understanding inequality issues and unemployment is considered to be a major societal problem. Further, our project will establish a better understanding of the driving forces of unemployment fluctuations over the business cycle and their connection to wage formation.