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Wage Inequality in a Frictional Labor Market

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  • Joel Shapiro

Abstract

Wage inequality in the United States has grown substantially in the past two decades. Standard supply-demand analysis in the empirics of inequality (e.g. Katz and Murphy (1992)) indicates that we may attribute some of this trend to an outward shift in the demand for high skilled labor. In this paper we examine a simple static channel in which the wage premium for skill may grow - increased firm entry. We consider a model of wage dispersion where there are two types of workers and homogeneous firms must set wages and preferences for what type of worker they would like to hire. We find that both the wage differential and the demand for high skill workers can increase with the proportion of high skill workers - these high skill workers therefore create their own demand without exogenous factors. In addition, within group wage inequality can increase in step with the between group wage inequality. Simulations of the model are provided in order to compare the findings with empirical results.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 94.

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Date of creation: Nov 2003
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Handle: RePEc:bge:wpaper:94

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Keywords: wage posting; wage inequality; search;

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References

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  1. Joel Shapiro, 2003. "Wage Inequality in a Frictional Labor Market," Working Papers 94, Barcelona Graduate School of Economics.
  2. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
  4. James W. Albrecht & Pieter A. Gautier & Susan B. Vroman, 2001. "Matching with Multiple Applications," Tinbergen Institute Discussion Papers, Tinbergen Institute 01-080/3, Tinbergen Institute.
  5. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  6. Kevin Lang & Michael Manove & William T. Dickens, 2005. "Racial Discrimination in Labor Markets with Posted Wage Offers," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-145, Boston University - Department of Economics.
  7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  8. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, Elsevier, vol. 98(2), pages 232-260, June.
  9. Shouyong Shi, 1998. "Frictional Assignment," Working Papers, Queen's University, Department of Economics 988, Queen's University, Department of Economics.
  10. Acemoglu, Daron & Shimer, Robert, 2000. "Wage and Technology Dispersion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(4), pages 585-607, October.
  11. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 410-42, June.
  12. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 700-712, September.
  14. repec:dgr:uvatin:2001080 is not listed on IDEAS
  15. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
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Cited by:
  1. Ben Heijdra & Jenny Ligthart, 2009. "Labor tax reform, unemployment, and search," International Tax and Public Finance, Springer, Springer, vol. 16(1), pages 82-104, February.
  2. Joel Shapiro, 2002. "Wage inequality in a frictional labor market," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 614, Department of Economics and Business, Universitat Pompeu Fabra.

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