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Frictional wage dispersion in search models: a quantitative assessment

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Author Info
Giovanni L. Violante
Per Krusell
Andreas Hornstein

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Abstract

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differerentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion - the ratio between the average wage and the lowest (reservation) wage paid. We show that in a large class of search and matching models this statistic (the "mean-min ratio") can be obtained in closed form as a function of observable variables (i.e., interest rate, value of leisure, and statistics of labor market turnover). Looking at various independent data sources suggests that, empirically, residual wage dispersion (i.e., inequality among observationally similar workers) exceeds the model's prediction by a factor of 20. We discuss three extensions of the model (risk aversion, volatile wages during employment, and on-the-job search) and find that, in their simplest version, they can improve its performance, but only modestly. We conclude that either frictions account for a tiny fraction of residual wage dispersion, or the standard model needs to be augmented to confront the data.

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Date of creation: 2006
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fernando Alvarez & Robert Shimer, 2008. "Search and Rest Unemployment," NBER Working Papers 13772, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2006. "Technology-policy interaction in frictional labor markets," Working Paper 06-10, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  3. Giovanni L. Violante & Per Krusell & Andreas Hornstein, 2006. "Technical appendix for "Frictional wage dispersion in search models: a quantitative assessment"," Working Paper 06-08, Federal Reserve Bank of Richmond. [Downloadable!]
  4. Fatih Guvenen & Burhanettin Kuruscu, 2007. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution: 1970-2000," NBER Working Papers 13095, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Ken Hori, 2007. "Wage-Directed Job Match with Multiple Applications and Multiple Vacancies: The Optimal Job Application Strategy and Wage Dispersion," Birkbeck Working Papers in Economics and Finance 0711, Birkbeck, School of Economics, Mathematics & Statistics. [Downloadable!]
  6. Julien Prat, 2007. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," IZA Discussion Papers 2780, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Per Krusell, 2007. "EconomicDynamics Interviews Per Krusell on Search and Matching," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 8(2), April. [Downloadable!]
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