Which Workers' Wages Track Productivity? The Role of Position Specificity and On-the-Job Search (with Bledi Taska) -
Which workers' wages track productivity regardless of the state of the labor market? Evidence suggests that workers in high-wage occupations (i) experience less wage sensitivity to labor market slack and (ii) are able to differentially extract higher pay from larger and more productive firms. Conversely, wages in low-wage occupations covary more with labor market slack, and a broad literature suggests that firm characteristics, such as size or productivity, no longer have a significant relationship with wages in low-wage jobs. In this paper, we demonstrate that these observations can be jointly rationalized by a model with worker-position skill specificity and on-the-job search. This is achieved without imposing exogenous heterogeneity in worker bargaining power, while remaining consistent with a range of recent findings about wage setting and recruiting behavior that have challenged other popular models. We document the differential sensitivity of wages in low-wage occupations to labor market slack over the last two business cycles, and we show that this cannot be accounted for by changes in minimum wages.