Wages and Wedges in an Estimated Labor Search Model

We estimate a search-based real business cycle economy using quantity data and a broad set of wage indicators, allowing the latent wage to follow a non-structural ARMA process. Under the estimated process, wages adjust immediately to most shocks and induce substantial variation in labor's share of surplus. These results are not consistent with either a rigid real wage or Nash bargaining. The model fit is excellent, and smoothed realizations of the wage are consistent with empirical measures. According to the model, shocks to intertemporal preferences are the primary cause of inefficient fluctuations in the labor market and the driver of variation in labor's share of surplus.