The effects of match uncertainty and bargaining on labor market outcomes: evidence from firm and worker specific estimates

In this paper we examine wage dispersion in labor markets across currently employed workers. We argue that differences in the potential productivity of a match (typically assumed to be known in the previous literature) generates a surplus between the minimum wage the worker is willing to accept and the maximum wage the firm is willing to offer for the job. Existence of this surplus leads to wage dispersion due to negotiating over the amounts extracted by each agent. Our objective is to estimate the surplus extracted by each firm-worker pair and the effect of the net extracted surplus on the wage, for each firm-worker pair using the two-tier stochastic frontier model. An empirical application finds that, on average, firms paid workers less than their expected productivity. More specifically, at the mean, the net effect of productivity uncertainty leads to equilibrium wages which are 3.33% below the expected productivity of matches.