Pecuniary Mobility Costs in a Two-Sector Model

Abstract

This paper develops a dynamic model of the labor market with a union sector and a nonunion sector in which workers who switch sectors have to bear pecuniary mobility costs. With pecuniary costs of workers, there exists a range of equilibria. And the size of the equilibrium range positively depends on pecuniary costs. When a shock is small, workers do not migrate and the wage rate alone absorbs the effects of the shock. The model also shows that a favorable spot sector-specific shock can increase not only unemployment but wage rates and that the economy needs more time to fully accomplish the adjustment process in response to a shock due to pecuniary mobility costs.