Alain Delacroix - Assistant Professor

Accepted for publication:

"Heterogeneous Matching with Transferable Utility: Two Labor Market Applications" (pdf format)
(International Economic Review, Vol. 44, No.1, pp. 313-30, February 2003)
(last updated: 08/31/2001)
Abstract: A model of the labor market under search frictions is developed, where participants are heterogeneous with respect to their productivity types and the individual decision of which type of agents to match with is endogenized. Wages are negotiated, so that all gains from trade are exploited. This has important implications for the equilibrium outcomes. In particular, two applications are studied. It is observed that countries with high (low) unemployment tend to exhibit low (high) wage dispersion. And there is evidence showing that individual and firm characteristics have more explanatory power for the French than for the American wage data. The model is able to replicate these two observations, underscoring the relevance of considering matching patterns between heterogeneous agents in the different economies. Since the model does not feature a minimum wage, I thus provide a theory of endogenous wage compression.

"Transitions into Unemployment and the Nature of Firing Costs" (pdf format)
(Review of Economic Dynamics, Vol. 6, pp. 651-71, 2003)
(last updated: 09/16/2002)

Abstract: We study the effects of firing taxes on labor market outcomes. These taxes, more common in European markets, include all administrative and procedural costs incurred by the firm. As such, they are independent of the dismissed worker's skill level. We establish that, for young workers, unemployment incidence increases with skill in high-firing-tax countries, while the opposite holds in economies with low firing taxes. The model is able to replicate these observations, while maintaining unemployment duration and the unemployment rate as decreasing functions of skill in all countries. Because of constant firing taxes, the effective tax rate diminishes with skill. Hence, the size of job destruction costs decreases with skill. Also, high-skill vacancies are more profitable, implying tighter markets. These two reasons generate the skill-incidence pattern.

"Sticky Bargained Wages" (pdf format)
(Journal of Macroeconomic, Vol. 26, pp. 25-44, 2004)
(last updated: 11/19/2002)

Abstract: A model is developed where wages are negotiated and wage rigidity arises naturally from the assumptions on the bargaining protocol. This result only requires that workers earn some income outside the market, but none of the assumptions on risk aversion or information imperfections necessary for the other standard explanations of wage rigidity. Relative inflexibility in wages is obtained despite characteristics generally associated with flexible wages: compensations are bargained at the individual level, they may be continuously renegotiated and despite rigid wages, separations are privately efficient. Finally, the model leads to predictions that are consistent with empirical findings on cyclical employment variability at different skill levels, which is not the case for the standard models of wage rigidity. To confirm this last fact, the model is simulated in a dynamic context.

“Trade Mechanism Selection in Markets with Frictions” (pdf format)
(forthcoming at the Review of Economic Dynamics)
(last updated: 12/18/2003) (with Gabriele Camera, Purdue University)

Abstract: We endogenize the trade mechanism in a search economy with many homogenous sellers and many buyers with unobservable heterogeneous valuations. We study how heterogeneity influences the sellers' choice of trade mechanism. Sellers can choose a pricing scheme to discriminate buyers or may simply target one buyer type. This entails a trade-off between speed of trade and realized gains. We also address the role of commitment to a price mechanism. A price setting externality arises because of a strategic complementarity in the sellers' pricing choices.

"Directed Search On the Job and the Wage Ladder" (pdf format)
(forthcoming at the International Economic Review)
(last updated: 07/30/2004) (with Shouyong Shi, University of Toronto)

Abstract: In this paper, we study the equilibrium in a large labor market where employed workers search on the job and firms direct workers’ search using wage offers and employment probabilities. All applicants observe all offers before the application. There is wage dispersion among workers, despite the fact that all workers and all jobs are homogeneous. Moreover, equilibrium wages form a ladder; that is, workers optimally choose to climb the ladder one rung at a time. Thus, wage mobility is limited endogenously. Also, wage gains diminish as a worker climbs up the ladder, because the gap between two adjacent rungs diminishes with wage. Furthermore, the density of the wage offer distribution is a strictly decreasing function, while the density of employed wages can be either decreasing or non-monotonic. The wage ladder generates these novel properties while retaining other realistic properties, such as that a worker’s quit rate decreases with wage and that a worker’s wage increases on average with his employment duration.

Some proofs are contained in:
"Directed Search On the Job and the Wage Ladder" (pdf format)
(Working Paper, University of Toronto) (with Shouyong Shi, University of Toronto)

"A Multisectorial Matching Model of Unions" (pdf format)
(last updated: 07/16/2004)

(forthcoming at the Journal of Monetary Economics)

Abstract: When contrasting European and American labor markets, the matching literature has overlooked the fact that union presence is much more prevalent in Europe than in the U.S., focusing primarily on policy differences. In this paper, I develop a matching model where unions have an important institutional presence. To build a model with partial unionization, a monopolistic competition model of the goods market is developed, while the labor market is characterized by matching frictions. The model can vary the extent of collective bargaining, as well as the degree of union coordination. Unions are also alternatively considered as "national" and "sectorial" unions. I also introduce unemployment insurance to study the interactions of policies with unions. With the level of bargaining coverage characterizing European economies, would powerful unions support generous unemployment benefits? The answer is that unions would only push for more generous benefits if this does not entail higher payroll taxes.

A paper dealing with related issues is:
"Union Power, Insider Power and Labor Market Flexibility" (pdf format)
(last updated: 07/05/2002)

Abstract: I study and contrast the effects of labor market policies - unemployment insurance and firing costs - and institutions, such as unions, in a matching framework. I consider both a unionized and a non-unionized economy. The union premium is used to calibrate the individual worker's ability to extract surplus. As firing costs create insiders, I find that "union power" is greater than "insider power", as evidenced by a positive premium between union wages and average insider wages. In addition, unions are also often blamed for the perceived lack of flexibility of European labor markets. The problem is that "flexibility" is not precisely defined, making the claim difficult to validate. I find that, for an appropriately defined notion of flexibility and for various union objective functions, unionized markets are not necessarily less flexible, despite generating higher unemployment. Finally, I show that, in fact, union embers do not benefit from generous European style policies. This indicates that powerful unions cannot be the driving force behind these generous benefits. The driving force has to be found somewhere else.

Under review:

“Trade and the (Dis) Incentive to Reform Labor Markets: The Case of Reform in the European Union” (pdf format)
(last updated: 11/10/2003) (with George Alessandria, Federal Reserve Bank of Philadelphia)

Abstract: In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through a change in the terms of trade. This reduces the incentive to reform labor markets. In a policy game over firing taxes between countries, we find that countries optimally choose positive levels of firing taxes. A coordinated elimination of firing taxes yields considerable benefits. This insight provides some explanation for recent efforts toward labor market reform in the European Union.

"Endogenous Selection of a Trade Mechanism in a Search-Theoretic Environment" (pdf format)
(last updated: 10/26/2001) (with Gabriele Camera, Purdue University)