Chapter 15
Job Search:
External and
Internal
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page
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-2
1. External Job Search
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15-3
Why Search?
 Workers search for the best job offer and
firms search for employees to fill job
vacancies.
 Search occurs because:
 Workers and jobs are highly
heterogeneous.
 Information about differences in jobs and
workers is imperfect and takes time to
obtain.
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15-4
Job Search Model
 Assume job searcher is unemployed and
seeking work.
 Job seeker is aware that a wide
distribution of wage offers exists for his
or her occupation.
 Job searcher can roughly estimate the
mean and variance of wage offers, but
does not know which employer is
offering which wage.
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15-5
Costs and Benefits of Job
Search
 Benefits
 Search allows individuals to obtain wage
offers and increase the chance of getting a
higher wage offer.
 Costs
 Explicit costs such as employment agency
fees and transportation to and from job
interviews.
 The major cost of continued job search is
the forgone earnings of the best wage
known wage offer.
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15-6
Acceptance Wage
 To help decide whether to accept a given
wage offer, a person may establish an
acceptance wage and reject any wage
below it.
 The acceptance wage equates the
marginal benefit of continued jobs search
with the marginal cost.
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• Given this frequency
distribution of
nominal wage offers
and the person’s
acceptance wage Wa,
he or she will reject all
offers lower than c
and accept any offer
greater than or equal
to c.
• The probability that a
specific offer will
exceed the acceptance
wage is 80 percent (.30
+ .30 + .15 + .05).
• During the period of
search for an
acceptable wage offer,
this person is
unemployed.
Wage Offers and the
Acceptance Wage
Distribution of Wage Offers
15-7
Wa
0.35
0.30
0.30
0.30
0.25
0.20
0.15
0.15
0.10
0.05
0.15
0.05
0.05
0.00
a
b
c
d
Nominal Wage Offers
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e
f
• Unexpected inflation
results in higher
nominal wage offers,
and the frequency
distribution shifts to
the right.
• Because this person’s
acceptance wage
remains at Wa, he or
she is more likely to
accept the next wage
offer and hence job
search falls
• But once people realize
that the nominal wage
offers are no higher in
real terms than before,
they adjust their
acceptance wage (e.g.,
Wa to W’a) and the job
search length returns to
normal.
Unexpected Inflation
and Job Search
Distribution of Wage Offers
15-8
W’a
Wa
0.35
0.30
0.30
0.30
0.25
0.20
0.15
0.15
0.10
0.05
0.15
0.05
0.05
0.00
a
b
c
d
Nominal Wage Offers
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e
f
Unemployment Benefits
and Job Search
• Unemployment benefits
reduce the net
opportunity cost of
rejecting wage offers and
continuing to search for
higher-paying
employment and thus
allow people to increase
acceptance wages.
• For the person shown, the
increase in the acceptance
wage from Wa to W’a
means that the probability
of receiving an
acceptable wage in the
next attempt falls from 80
percent to 20 percent (.15
+ .05).
• The length of job search
therefore rises.
Distribution of Wage Offers
15-9
W’a
Wa
0.35
0.30
0.30
0.30
0.25
0.20
0.15
0.15
0.10
0.05
0.15
0.05
0.05
0.00
a
b
c
d
Nominal Wage Offers
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e
f
15-10
Other Implications of Job
Search Model
 Since workers will not accept wage offers
below the acceptance wage, there can be
unfilled job vacancies even when
considerable unemployment exists.
 The longer a person’s expected job
tenure, the higher will be a person’s
acceptance wage.
 Continued job search has a higher
expected gain.
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15-11
Other Implications of Job
Search Model
 Random luck plays a role in the
distribution of wages and employment.
 Variations will occur in who gets a high
wage offer.
 The level of unemployment is partly a
function of the overall demand of labor.
 It takes longer for workers to find an
acceptable wage offer since fewer firms
are hiring.
 Also, workers may not initially adjust
their acceptance wage.
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15-12
Empirical Evidence
 Acceptance wage falls with time
unemployed and when unemployment
benefits are exhausted.
 The acceptance rate of wage offers is
between 80 and 100 percent.
 Unemployment benefits lengthen job
search.
 Duration of job search is higher for
blacks and older workers.
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15-13
Questions for Thought
1. Explain how each of the following would affect
the probability that a job searcher will accept
the next wage offer and thus affect the expected
length of his or her unemployment:
(a) a decline in the rate of inflation below the expected
one.
(b) a decrease in unemployment benefits.
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15-14
2. Internal Labor Markets
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15-15
Internal Labor Market
• A worker typically enters
an internal labor market at
the least-skilled port-ofentry job in the job ladder
or mobility chain.
• While the wage rate of
the port-of-entry job will
be strongly influenced by
the forces of demand and
supply in the local
external labor market,
wage rates and the
allocation of workers
within the internal labor
market are governed
primarily by
administrative rules and
procedures.
Shipping Department
Dispatcher
Long-distance driver
Local Driver
Packer
Loader
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Port of
Entry
External
Labor
Market
15-16
Reasons for Internal Labor
Markets
 Firms have significant hiring and training
costs and these costs can be reduce by
lowering worker turnover.
 Firms use job ladders –the key
characteristic of internal labor markets –
as method to reduce worker turnover.
 The lower turnover increases the return
on firm investments in specific training.
 Firms can lower recruiting and screening
costs since they will have a lot of
information about the existing workforce.
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15-17
Reasons for Internal Labor
Markets
 The job ladder also provides an incentive
for workers to seek new skills and work
hard.
 Workers get the benefits of increased job
security, opportunities for promotion and
training, protection from the external
labor market.
 Also, the formal rules protect workers
from arbitrary management decisions.
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15-18
Role of Unions
 Internal labor markets are both a cause
and effect of unionization.
 Internal labor markets encourage
unionization for the following reasons:
 Lower worker turnover.
 Firm-specific training increases workers
bargaining power.
 The rule and procedures of internal labor
markets limit managerial decisions.
 Unionization can be a response when
managerial decisions violate these rules.
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15-19
Role of Unions
 Unionization can encourage internal labor
markets.
 The collective bargaining agreement
formalizes the rules and procedures
inherent in internal labor markets.
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15-20
Labor Allocation and the
Wage Structure
 Promotions are generally determined on
the basis of seniority.
 The most-experienced rather than the
most able worker will typically get an
promotion.
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15-21
Wages and Job Evaluation
• The wage structure is set
by a job evaluation
procedure which assigns
wage rates for jobs on the
basis of job characteristics
and worker traits.
• Those jobs with more
points are assigned higher
wages.
• Wages are assigned
usually to jobs rather than
workers.
Factor
Maximum
Points
Working conditions
15
Responsibility for equipment
25
Responsibility for other
worker
20
Skill
20
Education
35
Physical effort
10
Total points
125
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15-22
The Efficiency Issue
 Internal labor markets may increase
efficiency since they reduce labor
turnover, and the lower the costs of
training, recruiting, and screening.
 Internal labor markets may increase
dynamic efficiency or increases in
productivity due to improvements in the
quality of labor and other resources.
 Since the jobs of senior workers are
secure, they can pass on their knowledge
and skills to less-skilled workers.
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Deferred Pay Scheme
• Some argue the pay structure of
internal labor markets also solves
incentive problems.
• In the diagram is MRP constant
over the person’s work life.
• Younger workers receive pay
that is less than their MRP, while
older workers are paid more than
their MRP.
• The prospect of high pay at the
end of one’s career, may
discourage shirking and reduce
turnover.
• Because of the increased
productivity, workers may get
higher lifetime earnings than if
wages equaled MRP each year.
Wage rate, MRP
15-23
Wage
MRP
Quantity of
Labor Hours
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15-24
Question for Thought
1. Explain the following statement: “Unions are
both a consequence and a cause of internal labor
markets.” Why might the presence of internal
labor markets in a firm encourage unionization?
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15-25
End
Chapter 15
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