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Alternative theories of wage dispersion

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  • Gaumont, Damien
  • Schindler, Martin
  • Wright, Randall

Abstract

We analyze labor market models where the law of one price does not hold; i.e., models with equilibrium wage dispersion. We begin assuming workers are ex ante heterogeneous, and highlight a flaw with this approach: if search is costly, the market shuts down. We then assume workers are homogeneous but matches are ex post heterogeneous. This model is robust to search costs, and delivers equilibria equilibrium wage dispersion. However, we prove the law of two prices holds: generically we cannot get more than two wages. We explore several other models, including one combining ex ante and ex post heterogeneity; this model is robust, and can deliver more than two-point wage distributions.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 4 (May)
Pages: 831-848

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:4:p:831-848

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  1. Berg, G.J. & Ridder, G., 1993. "An empirical equilibrium search model of the labour market," Serie Research Memoranda 0039, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  2. Damien Gaumont & Martin Schindler & Randall Wright, 2005. "Alternative Theories of Wage Dispersion," PIER Working Paper Archive 05-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Ken Burdett & Randall Wright, 1998. "Two-Sided Search with Nontransferable Utility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 220-245, January.
  4. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  5. Eckstein, Zvi & van den Berg, Gerard J, 2004. "Empirical Labour Search: A Survey," CEPR Discussion Papers 4199, C.E.P.R. Discussion Papers.
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  10. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
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  22. Curtis, Elisabeth & Wright, Randall, 2004. "Price setting, price dispersion, and the value of money: or, the law of two prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1599-1621, November.
  23. Gerard J. van den Berg, 1998. "Empirical Inference with Equilibrium Search Models of the Labor Market," Tinbergen Institute Discussion Papers 98-089/3, Tinbergen Institute.
  24. Kenneth Burdett & Ricardo Lagos & Randall Wright, 2002. "Crime, Inequality, and Unemployment, Second Version," PIER Working Paper Archive 03-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Sep 2003.
  25. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
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