How does the decline of the car industry in Detroit a↵ect wages of workers in the textile indus- try? How does the rise of Maquilladoras and the resulting o↵shoring of textile machine operators

This paper examines the importance of workers’ outside options in the 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 the wages in alternate jobs, turning the 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 di↵erences 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 di↵erences 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