On the Quantitative Importance of Wage Bargaining Models

Abstract

Four general equilibrium search models are compared quantitatively. The baseline framework is a calibrated macroeconomic model of the US economy designed for a welfare analysis of unemployment insurance policy. The other models make three simple and natural specification changes, regarding tax incidence, monopsony power in wage determination, and the relevant threat point. These specification changes have a major impact on the equilibrium and on the welfare implications of unemployment insurance, partly because search externalities magnify the effects of wage changes. The optimal level of unemployment insurance depends strongly on whether raising benefits has a larger impact on search effort or on hiring expenditure.