Three essays on matching in heterogeneous labor markets

Chapter 1 develops a model of the labor market that can account for the following facts. The duration of unemployment is higher for lesser skilled workers in all countries. The probability of becoming unemployed is also higher for lesser skilled workers in countries with low fixed firing costs, i.e. costs that are not proportional to wage. However, lesser skilled workers actually become unemployed less frequently than their higher skilled counterparts in countries with high fixed firing costs. These facts are established for a sample of young workers. The model, which is based on matching frictions, only relies on different firing regulations to explain the diverging patterns. Its main implications is that it is necessary to differentiate between the various types of firing costs, such as severance payments or fixed administrative costs, when looking at their effect of labor market outcomes. This is generally not done in the theoretical or empirical literature. Chapter 2 deals with matching patterns among agents of different skill levels, when search is costly. In order to replicate a labor market setting, utility from the match is assumed to be transferable between agents. The model incorporates a decision of which skill levels any individual is willing to match with. Because this decision determines the distribution of searching agents, several different matching patterns may arise in equilibrium, as well as the possibility of multiple equilibria. The conditions for existence of a particular equilibrium are laid out, as well as conditions on the production function restricting the number of possible equilibrium matching patterns. One implication of the model is that equilibria with infrequent matching, and hence high unemployment exhibit low wage dispersion and vice versa, replicating what is observed in the U.S. and European economies. A second implication is that a technology shock rendering high skill workers more productive, relative to low skill workers would result in matching by type, hence increasing unemployment. Chapter 3 investigates the effects of a minimum wage regulation on labor market outcomes, when the market is characterized by information imperfections. The presence of a minimum wage restricts the possible outcomes of the bargain between the firm and the worker, and hence, may lead to privately inefficient match breakdowns. Also, the regulation reduces firms' incentive to engage in costly search. The two effects result in higher unemployment duration and higher probability of becoming unemployed for those skill levels affected by the regulation.