On-the-job search and exploding wages

Real wages have been largely stagnant over the last decades for most workers, except for huge increases for some specialists, like CEOs, athletes and even some academics. Why so? Giuseppe Moscarini offers an explanation: it is all about the corporate culture and how employers chose to match outside offers for their employees or not.

Back in the 1970s, say, it was accepted by all human resource managers that outside offers should not be matched. Knowing this, employees had little incentive to pursue on-the-job searches. If they obtained an offer, the monetary, time and psychological cost of moving jobs (and potentially living quarters) made an outside offer little attractive. As a consequence, wages followed closely productivity.

Suppose now that the employer cannot commit to not match outside offers. Employees will then seek more outside offers, thus generating wage increases through matching. Knowing this, workers are willing to accept lower initial wages, expecting future increases. Wages now are disconnected from productivity.

Note that an employer who has matched an outside offer in the past cannot credibly commit not to match in the future, as its employees are actively seeking outside jobs. Thus matching once leads to an irreversible change in equilibrium.

It remains that for most professions, matching of outside offers in unheard of. But once it happens, expect a sudden boost in wages. Expect no increases thereafter, as firms have exhausted themselves trying to outbid each other.