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Social Preferences, Skill Segregation and Wage Dynamics

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  • Cabrales Goitia Antonio

    ()
    (UNIVERSITY CARLOS III OF MADRID)

  • Calvó-Armengol Antoni

    ()
    (UNIVERSITY CARLOS III OF MADRID)

  • Pavoni Nicola

    ()
    (POMPEU FABRA UNIVERSITY AUTONOMOUS UNIVERSITY OF BARCELONA UNIVERSITY COLLEGE LONDON)

Abstract

We study the earning structure and the equilibrium assignment of workers to firms in a model where workers have social preferences and skills are perfectly substitutable in production. We allow firms to offer long-term contracts and for frictions in the labour market in the form of mobility costs. For low moving costs between firms, heterogeneous productivities lead to widespread workplace skill segregation and the whole market wage dispersion is explained by between firm differences. In a labor market with intermediate levels of mobility costs, segregation is more moderate and wage dispersion arises both within and across firms. For high levels of moving costs, the whole wage dispersion is within the firm and becomes zero when the moving costs are sufficiently high. We show that long-term contracts in the presence of social preferences associate within-firm wage dispersion with novel internal labor market features such as a dynamic form of wage compression, gradual promotions an dwage non-monotonicity.

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Bibliographic Info

Paper provided by Fundacion BBVA / BBVA Foundation in its series Working Papers with number 201053.

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Length: 53
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:fbb:wpaper:201053

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Keywords: Contract theory; mechanism design; envy; social preferences; gradual promotions; dynamic wage structure.;

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References

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  1. de Bartolome, Charles A M, 1990. "Equilibrium and Inefficiency in a Community Model with Peer Group Effects," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 110-33, February.
  2. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-93, May.
  3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  4. Patrick Legros & Andrew Newman, 2007. "Beauty is a beast, frog is a prince: assortative matching in a nontransferable world," ULB Institutional Repository 2013/7022, ULB -- Universite Libre de Bruxelles.
  5. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
  6. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  7. Fershtman, C. & Weiss, Y. & Hvide, H.K., 2001. "Status Concerns and the Organization of Work," Papers 2001-2, Tel Aviv.
  8. Hibbs, Douglas A, Jr & Locking, Hakan, 2000. "Wage Dispersion and Productive Efficiency: Evidence for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 755-82, October.
  9. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
  10. Pedro Rey-Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, 06.
  11. Patrick Legros & Andrew Newman, 2002. "Monotone matching in perfect and imperfect worlds," ULB Institutional Repository 2013/7032, ULB -- Universite Libre de Bruxelles.
  12. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-71, September.
  13. Nicola Pavoni, 2009. "Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 323-362, 05.
  14. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
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Cited by:
  1. Hyll, Walter & Stark, Oded, 2011. "On the economic architecture of the workplace: repercussions of social comparisons amongst heterogeneous workers," University of Tuebingen Working Papers in Economics and Finance 6, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Antonio Cabrales & Antoni Calvó-Armengol, 2005. "Aversion to Inequality and Segregating Equilibria," Working Papers 177, Barcelona Graduate School of Economics.
  3. Felix Bierbrauer & Nick Netzer, 2012. "Mechanism design and intentions," ECON - Working Papers 066, Department of Economics - University of Zurich, revised Apr 2014.
  4. Monica I. Garcia-Perez & Fredrik Andersson & John Haltiwanger & Fredrik Kristin McCue & Seth Sanders, 2011. "Workplace Concentration of Immigrants," Working Papers 2011-20, Saint Cloud State University, Department of Economics.
  5. Antonio Cabrales & Raffaele Miniaci & Marco Piovesan & Giovanni Ponti, 2010. "Social Preferences and Strategic Uncertainty: An Experiment on Markets and Contracts," American Economic Review, American Economic Association, vol. 100(5), pages 2261-78, December.
  6. Alain Cohn & Ernst Fehr & Lorenz Goette, 2013. "Fair wages and effort provision: Combining evidence from the lab and the field," ECON - Working Papers 107, Department of Economics - University of Zurich.
  7. Cabrales, Antonio & Calvó-Armengol, Antoni, 2008. "Interdependent preferences and segregating equilibria," Journal of Economic Theory, Elsevier, vol. 139(1), pages 99-113, March.
  8. Antonio Cabrales, 2010. "The causes and economic consequences of envy," SERIEs, Spanish Economic Association, vol. 1(4), pages 371-386, September.

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