UNDERPAID AND OVERWORKED - MEASURING THE EFFECT OF IMPERFECT INFORMATION ON WAGES

This paper investigates the degree of shortfall between the wages workers earn and what they could earn assuming perfect or costless information in the labor market. We use the stochastic frontier regression technique to estimate the degree of shortfall found in wages on an individual basis. The paper tests, in addition, a number of hypotheses supplied by search theory in this context. The results generally confirm the propositions from search theory and indicate that, on the average, worker wages fall short of worker potential wages by approximately 10 percent.