Wage Dispersion and Inter-Firm Bargaining in a Search and Matching Model

In the context of the canonical search and matching model with many worker firms, it is known that a unique single wage steady state equilibrium exists even when employer factor productivity differs. Contrary to this result, matched employer-employee data suggest both wage and productivity dispersion and a positive cross-firm correlation between the two. In this paper, the existence of a continuum of steady state equilibrium each characterized by a non-degenerate distribution of wages with the property that more productive firm pay more is established if employed worker can search on-the-job. Furthermore, the unemployment rate in any of the disperse wage equilibria is lower than in the single wage equilibrium.