Econometrica: Mar 2010, Volume 78, Issue 2

An Equilibrium Theory of Learning, Search, and Wages

https://doi.org/10.3982/ECTA8061
p. 509-537

Francisco M. Gonzalez, Shouyong Shi

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.

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Supplement to "An Equilibrium Theory of Learning, Search and Wages"

PDF file containing complete proofs of the lemmas and theorems presented in the paper.

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