An equilibrium theory of learning, search, and wages

Francisco M. Gonzalez, Shouyong Shi

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

We examine the labor market effects of incomplete information about the workers' own job-finding process. Search outcomes convey valuable information, and learning from search generates endogenous heterogeneity in workers' beliefs about their job-finding probability. We characterize this process and analyze its interactions with job creation and wage determination. Our theory sheds new light on how unemployment can affect workers' labor market outcomes and wage determination, providing a rational explanation for discouragement as the consequence of negative search outcomes. In particular, longer unemployment durations are likely to be followed by lower reemployment wages because a worker's beliefs about his job-finding process deteriorate with unemployment duration. Moreover, our analysis provides a set of useful results on dynamic programming with optimal learning.

Original languageEnglish (US)
Pages (from-to)509-537
Number of pages29
JournalEconometrica
Volume78
Issue number2
DOIs
StatePublished - Mar 2010

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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