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Sources of earnings inequality: Estimates from an on-the-job search model of the US labor market

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Author Info

  • Flabbi, Luca
  • Leonardi, Marco

Abstract

Since the early 1980s the labor market in the United States has seen a substantial increase in earnings dispersion. We study the issue by developing an on-the-job search model of the US labor market that allows for wage and employment mobility as a result of optimal individual behavior. We estimate its structural parameters on PSID data at different points in time to clarify the sources of the evolution of earnings inequality and instability between 1987 and 1996. This procedure allows to: compute lifetime measure of inequality on top of the usual cross-sectional measure of inequality and provide counterfactual experiments that evaluate the contribution of different parameters to changes over time by taking into account some equilibrium effects. We find that the increase in lifetime inequality and in cross-sectional inequality have been generated by different sources and that these sources are different by skills: changes in the wage offer distribution are the main determinant of the increase in inequality for skilled workers while both mobility changes and wage offer distribution changes are needed to explain changes for the unskilled.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 6 (August)
Pages: 832-854

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:6:p:832-854

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Earnings inequality Earnings instability On-the-job search Structural estimation;

References

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  1. Moshe Buchinsky & Jennifer Hunt, 1999. "Wage Mobility In The United States," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 351-368, August.
  2. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
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  6. Luca Flabbi, 2004. "Gender Discrimination Estimation in a Search Model with Matching and Bargaining," Working Papers gueconwpa~04-04-08, Georgetown University, Department of Economics.
  7. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  8. Flinn, Christopher J, 2002. "Labour Market Structure and Inequality: A Comparison of Italy and the U.S," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 611-45, July.
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  10. Christopher Flinn & James Mabli, 2008. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," Carlo Alberto Notebooks 91, Collegio Carlo Alberto.
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  18. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  19. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November.
  20. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
  21. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  22. James J. Heckman & Christopher J. Flinn, 1982. "New Methods for Analyzing Structural Models of Labor Force Dynamics," NBER Working Papers 0856, National Bureau of Economic Research, Inc.
  23. Bernhardt, Annette, et al, 1999. "Trends in Job Instability and Wages for Young Adult Men," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S65-90, October.
  24. Jean-Marc Robin & Francois Fontaine & Fabien Postel-Vinay & Jesper Bagger, 2011. "A Feasible Equilibrium Search Model of Individual Wage Dynamics with Experience Accumulation," 2011 Meeting Papers 278, Society for Economic Dynamics.
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Cited by:
  1. Luca Flabbi and James Mabli, 2012. "Household Search or Individual Search: Does It Matter? Evidence from Lifetime Inequality Estimates," Working Papers gueconwpa~12-12-03, Georgetown University, Department of Economics.

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