A co-editor and four anonymous referees made detailed comments and suggestions that led to significant improvements of the paper. This paper (an earlier version of which had the title “Learning From Unemployment”) was presented at the NBER Summer Institute (Cambridge, 2005), the Canadian Macro Study Group Meeting (Vancouver, 2006), Society for Economic Dynamics Meeting (Istanbul, 2009), NBER Conference on Macro Perspectives of the Labor Market (Minneapolis FED, 2009), University of Pennsylvania, Illinois–Urbana/Champaign, and Wisconsin–Madison. We have benefited from comments and suggestions by the participants of these conferences and the workshops, and by Philipp Kircher, Rob Shimer, Stephan Lauermann, Kevin Reffett, and Bob Becker. Both authors would like to acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. The second author would also like to acknowledge financial support from the Bank of Canada Fellowship. The opinion expressed here is the authors' own and does not reflect the view of the Bank of Canada.
An Equilibrium Theory of Learning, Search, and Wages
Version of Record online: 8 APR 2010
© 2010 The Econometric Society
Volume 78, Issue 2, pages 509–537, March 2010
How to Cite
Gonzalez, F. M. and Shi, S. (2010), An Equilibrium Theory of Learning, Search, and Wages. Econometrica, 78: 509–537. doi: 10.3982/ECTA8061
- Issue online: 8 APR 2010
- Version of Record online: 8 APR 2010
- Manuscript received August, 2008; final revision received December, 2009.
- directed search;
- monotone comparative statics
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.