On‐the‐Job Search and the Wage Distribution

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Abstract
Estimates of the structural parameters of a job separation model derived from the theory of on-the-job search are reported in this paper. Given that each employer pays the same wage to observably equivalent workers but wages are dispersed across employers, the theory implies that an employer's separation ∞ow is the sum of an exogenous out∞ow unrelated to the wage paid and a job-to-job ∞ow that decreases with the employer's wage. The speciflcation estimated allows worker search efiort to depend on the wage currently earned. The empirical results imply that search efiort declines with the wage paid, as the theory predicts, using Danish IDA data for the years 1994-1995. Furthermore, the estimates for the full sample and four occupational sub-samples explain the employment efiect, deflned as the horizontal difierence between the distribution of wages earned and the distribution of wages ofiered.