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Equilibrium Wage Distributions

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  • Joseph E. Stiglitz

Abstract

This paper analyzes equilibrium in labor markets with costly search. Even in steady state equilibrium, identical labor may receive different wages; this may be the case even when the only source of imperfect information is the inequality of wages which the market is perpetuating. When there are information imperfections arising from (symmetric)differences in non-pecuniary characteristics of jobs and preferences of individuals, there will not in general exist a full employment, zero profit single wage equilibrium.There are, in general, a multiplicity of equilbria. Equilibrium may be characterized by unemployment; in spite of the presence of an excess supply of labor, no firm is willing to hire workers at a lowerwage. It knows that if it does so, the quit rate will be higher, and hence turnover costs(training costs) will be higher, so much so that profits will actually be lower. The model thus provides a rationale for real wage rigidity. The model also provides a theory of equilibrium frictional unemployment.Though the constrained optimality (taking explicitly into account the costs associated with obtaining information and search) may entail unemployment and wage dispersion, the levels of unemployment and wage dispersion in the market equilibrium will not, in general, be (constrained) optimal.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1337.

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Date of creation: Apr 1984
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Publication status: published as Stiglitz, Joseph E. "Equilibrium Wage Distributions." The Economic Journal, Vol. 95, (September 1985), pp. 595-618.
Handle: RePEc:nbr:nberwo:1337

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  1. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 117-25, March.
  2. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  3. Philip H. Dybvig & Gerald David Jaynes, 1980. "Output Supply, Employment, and Intra-Industry Wage Dispersion," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 546, Cowles Foundation for Research in Economics, Yale University.
  4. Arnott, Richard J & Stiglitz, Joseph E, 1985. "Labor Turnover, Wage Structures, and Moral Hazard: The Inefficiency of Competitive Markets," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 3(4), pages 434-62, October.
  5. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
  6. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 393-406, October.
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