Search and the Efficient Assignment of Workers to Jobs

In a model in which different types of workers form matches with different types of employers, a method of calculating opportunity costs of workers and jobs is derived. These are shown to differ systematically from the reservation wages and profits used by workers and employers to determine whether matches should be formed. Ex ante differences among workers and among jobs then generate externalities in the labor market, resulting in inefficient assignments of workers to jobs and multiple equilibria. Intervention in the labor market, by altering the assignment, can increase aggregate output but may cause regressive redistribution. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.