Estimating Worker Information Gaps From A Stochastic Wage Frontier: A Study Of Canadian Labour Markets

Abstract

In the presence of imperfect information in labour markets, optimal job search entails accepting a wage offer if it exceeds a worker’s reservation wage. However, this generally means that a worker with a given skill, will not earn the maximum wage on offer, and the gap between the maximum wager and the wage earned could be viewed as an indicator of labour market inefficiency arising from worker information gaps. The inefficiency arises because information is costly, so workers do not search long enough to discover the maximum wage, which would otherwise be sought and earned if information were costless. The aim of this paper is to empirically investigate the extent of labour market inefficiency within and across a number of population strata in Canada. These strata include individuals grouped according to various socio-economic and demographic characteristics such as gender, geographical location, education, and immigration status. The econometric model adopted is the stochastic frontier function used initially extensively in studies of production and cost efficiency of firms, and subsequently employed in studies of worker information gaps. The data we use are drawn from the 2001 Census of Canada.