An Empirical Equilibrium Search Model of the Labour Market

In structural empirical models of labour market search, the distribution of wage offers is usually assumed to be exogenous. Because in setting their wages profit-maximizing firms should consider the reservation wages of job seekers, this assumption is hard to justify. In this paper we estimate a structural equilibrium search model in which the wage offer distribution is endogenous. The model takes account of the behaviour of unemployed and employed individuals as well as firm behaviour. The equilibrium distributions of wage offers and earnings are non-degenerate. The model is estimated using panel data on unemployed and employed individuals. We distinguish between separate segments of the labour market. The results are used to estimate the degree of monopsony power of firms. Further, the effect of changes in the legal minimum wage are examined. Berg has been made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences. The Organization for Strategie Labour Market Research allowed us to use the OSA panel. Alexander Bruyns, Trea Aldershof and Ruud Teunter provided excellent computing assistance.