Working Knowledge
Business Research for Business Leaders
07 Mar 2013Working Paper Summaries

Prominent Job Advertisements, Group Learning, and Wage Dispersion

by Julio J. Rotemberg
What role do peers play when job seekers assess prospects? This research presents a stylized model that generates wage inequality as a result of people's reliance on peers for information about the wages that are offered in the market and the length of time one can expect to spend unemployed. The key idea of the model is that people whose peers have low wages and short unemployment spells come to expect that all jobs have relatively low wages so they accept low-wage jobs relatively quickly even when they shouldn't. People with peers that have higher wages are, instead, more choosy and wait for better jobs. Key concepts include:
  • Because workers search for jobs only a few times in their entire lifetimes, their ability to learn about the distribution of wage offers from their own experience is extremely limited. They may thus base their decisions mostly on the information provided by people they know.
  • Peer groups can lead their members to accept relatively unattractive jobs by causing them to believe that better opportunities are more scarce than they actually are.
  • More sophisticated workers wait for higher wages and learn from their group that it is rational to do so.

Author Abstract

A model is presented in which people base their labor search strategy on the average wage and the average unemployment duration of people who belong to their peer group. It is shown that, if the distribution of wage offers is not stationary so lower wage offers tend to arrive before higher wage ones, such learning can induce a great deal of wage inequality. An equilibrium model is developed in which firms can choose either to advertise their job openings prominently or not. Prominent ads are assumed to have more influence on more inexperienced job searchers who are less able to identify a multiplicity of viable jobs. Equilibria can then feature groups that learn naively from the experience of their members and accept low wage offers from prominent ads while other groups do not find these offers acceptable. A new test statistic is proposed that measures whether, as predicted by the model, the gains from increasing one's reservation wage are larger than either those that people expect or those predicted by models in which job offers are stationary.

Paper Information

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