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Equilibrium Wage Dispersion with Worker and Employer Heterogeneity

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  • Fabien Postel-Vinay

    ()
    (INRA, Centre Paris-Jourdan and CEPR, London)

  • Jean-Marc Robin

    ()
    (INRA, Centre Paris-Jourdan, CREST-INSEE, Malakoff, France and CEPR, London)

Abstract

We construct and estimate an equilibrium search model with on-the-job-search. Firms make take-it-or-leave-it wage offers to workers conditional on their characteristics and they can respond to the outside job offers received by their employees. Unobserved worker productive heterogeneity is introduced in the form of cross-worker differences in a "competence" parameter. On the other side of the market, firms also are heterogeneous with respect to their marginal productivity of labor. The model delivers a theory of steady-state wage dispersion driven by heterogenous worker abilities and firm productivities, as well as by matching frictions. The structural model is estimated using matched employer and employee French panel data. The exogenous distributions of worker and firm heterogeneity components are nonparametrically estimated. We use this structural estimation to provide a decomposition of cross-employee wage variance. We find that the share of the cross-sectional wage variance that is explained by person effects varies across skill groups. Specifically, this share lies close to 40% for high-skilled white collars, and quickly decreases to 0% as the observed skill level decreases. The contribution of market imperfections to wage dispersion is typically around 50%. Copyright The Econometric Society 2002.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 70 (2002)
Issue (Month): 6 (November)
Pages: 2295-2350

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Handle: RePEc:ecm:emetrp:v:70:y:2002:i:6:p:2295-2350

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  1. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Universite de Montreal, Departement de sciences economiques.
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  6. Postel-Vinay & Robin, 2002. "Equilibrium wage dispersion with worker and employer heterogeneity," Working Papers 155908, Institut National de la Recherche Agronomique, France.
  7. Jean-Marc Robin & Sébastien Roux_, 1998. "Random or Balanced Matching : An Equilibrium Search Model with Endogenous Capital and Two-Sided Search," Working Papers 98-38, Centre de Recherche en Economie et Statistique.
  8. Acemoglu, D. & Shimer, R., 1997. "Efficient Wage Dispersion," Working papers 97-25, Massachusetts Institute of Technology (MIT), Department of Economics.
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  11. Jean-Marc ROBIN & Sébastien ROUX, 2002. "An Equilibrium Model of the Labor Market with Endogenous Capital and Two-Sided Search," Annales d'Economie et de Statistique, ENSAE, issue 67-68, pages 257-307.
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