A Theory of Labor Markets with Allocative Wages

We develop a model of a frictional labor market with idiosyncratic and aggregate shocks, sticky wages, and two-sided lack of commitment between workers and firms. In this environment, wages are allocative in the sense that inefficient job separations arise when the wage-to-productivity ratio falls outside of a supported range. We analytically characterize equilibrium job separation policies and show how to use microdata on wage changes and worker transitions between jobs in order to recover the unobserved distribution of wage-to-productivity ratios. The latter is a sufficient statistic for the prevalence of inefficient job separations as well as the aggregate response of employment and real wages to monetary shocks