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“Alternative Theories of Wage Dispersion”

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  • GAUMONT D.
  • SCHINDLER M.
  • WRIGHT R.

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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Paper provided by ERMES, University Paris 2 in its series Working Papers ERMES with number 0505.

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Date of creation: 2005
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Handle: RePEc:erm:papers:0505

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  1. P. Diamond, 1980. "Mobility Costs, Frictional Unemployment and Efficiency," Working papers 257, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
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  13. Gaumont, Damien & Schindler, Martin & Wright, Randall, 2006. "Alternative theories of wage dispersion," European Economic Review, Elsevier, vol. 50(4), pages 831-848, May.
  14. 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.
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  21. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
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  25. Damien Gaumont & Martin Schindler & Randall Wright, 2006. "Equilibrium Wage Dispersion: An Example," 2006 Meeting Papers 147, Society for Economic Dynamics.
  26. Albrecht, James W & Jovanovic, Boyan, 1986. "The Efficiency of Search under Competition and Monopsony," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1246-57, December.
  27. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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  29. Albrecht, James W & Vroman, Susan B, 1992. "Non-existence of Single-Wage Equilibria in Search Models with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 617-24, July.
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