Job Auctions ∗

This paper proposes job auctions as a theory of wage determination in models of labor markets with search frictions. Workers apply for jobs by bidding in auctions, and firms reward the job to the applicant who offers it the most profit. In equilibrium, more productive applicants always outbid less productive ones, but the threat of competition holds down the former’s wage demand. The equilibrium of the job auction model is always efficient, in contrast to standard search models. The model produces a distinctive and empirically testable relationship between the wage-productivity schedule, the unemployment-productivity schedule, and the underlying labor productivity distribution. The model also predicts that the minimum wage will have a ripple effect on workers for whom it is not binding, by reducing the competition from less productive workers. ∗This paper is a substantial revision of the second chapter of my MIT Ph.D. dissertation, “Do Good Guys Come in First? How Wage Determination Affects The Ranking of Job Applicants”. I am grateful to numerous individuals and seminar participants for their helpful comments and discussions. Thanks in particular to my thesis advisors Daron Acemoglu and Olivier Blanchard. I also thank the Alfred P. Sloan Foundation and National Science Foundation grant SBR-9709881 for financial support. Job Auctions Robert Shimer