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Efficient Wage Dispersion

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  • Acemoglu, Daron
  • Shimer, Robert

Abstract

In market economies identical workers appear to receive very different wages, violating the ‘law of one price’ of Walrasian markets. It is argued in this paper that in the absence of a Walrasian auctioneer to coordinate trade: (i) wage dispersion among identical workers is very often an equilibrium phenomenon; and (ii) such dispersion is necessary for a market economy to function. The paper analyses an environment in which firms post wages and workers may, at a small cost, observe one or more of the posted wages, i.e. search, before deciding where to apply. Both with homogeneous and heterogeneous forms, equilibrium wage dispersion is necessary for the economy to approximate efficiency. Without wage dispersion, workers do not search, and wages are depressed. As a result: (a) there is excessive entry of firms; and (b) because, in the absence of search, high-productivity firms cannot attract workers faster than low-productivity firms, their relative profitability is reduced, and technology choices are distorted.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1572.

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Date of creation: Feb 1997
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Handle: RePEc:cpr:ceprdp:1572

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Related research

Keywords: Efficiency; Search; Search Intensity; Sorting; Wage Dispersion; Wage Posting;

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Cited by:
  1. Marimon, Ramon & Zilibotti, Fabrizio, 1999. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 109(455), pages 266-91, April.
  2. 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.
  3. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  4. Gerard J. van den Berg, 2003. "Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1337-1357, November.
  5. Daron Acemoglu, 1998. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," NBER Working Papers 6658, National Bureau of Economic Research, Inc.

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