Endogenous On-the-job Search and Frictional Wage Dispersion

This paper addresses the large degree of frictional wage dispersion in US data.The standard job matching model without on-the-job search cannot replicate thispattern. With on-the-job search, however, unemployed job searchers are more willingto accept low wage offers since they can continue to seek for better employmentopportunities. This explains why observably identical workers may be paid very differently.Therefore, we examine the quantitative implications of on-the-job searchin a stochastic job matching model. Our key result is that the inclusion of variableon-the-job search increases the degree of frictional wage dispersion by an order of amagnitude.