The relation between wages and labor market frictions:: An empirical analysis based on matched worker-firm data

This paper addresses the relationship between search frictions and the wage formation of firms. According to the Burdett-Mortensen model, firms exploit frictions by setting lower wages. Moreover, if we allow for productivity dispersion of firms within a single labor market, this results in less competition between these firms. With the IDA data, a large database of survey data from the Danish labor market, we first reconstruct the labor market histories of individual workers to estimate parameters that determine the degree of search frictions across labor market segments. Second, we estimate wage regressions that incorporate the effect of search frictions. In doing this, we do not fully impose the structure of the equilibrium search model in all cases.