Wage bargaining in a matching market: Experimental evidence

Wage negotiation plays a central role in the dynamics of search and matching models. We explore the theoret-ical wage predictions of the canonical search and matching model of Diamond (1982) in laboratory bargaining experiments. Overall, wages in the experiment are less responsive to changes in the market conditions than the-ory predicts. Wages respond to changes in unemployment insurance in the correct direction, yet the size of the response is about half of what theory predicts. On the other hand, contrary to theory, wages are unresponsive to changes in the level of unemployment. We also find that wages of new matches are more sensitive than wages of on-going matches, and that the duration of unemployment influences wages in certain settings.