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Alternative Theories of Wage Dispersion

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  • Damien Gaumont

    ()
    (Universite Pantheon-Assas (Paris II))

  • Martin Schindler

    ()
    (International Monetary Fund)

  • Randall Wright

    ()
    (Department of Economics, University of Pennsylvania)

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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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-017.

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Length: 25 pages
Date of creation: 23 Feb 2005
Date of revision:
Handle: RePEc:pen:papers:05-017

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Keywords: wages; search; distributions;

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References

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  1. Eckstein, Zvi & van den Berg, Gerard J., 2003. "Empirical Labor Search: A Survey," IZA Discussion Papers 929, Institute for the Study of Labor (IZA).
  2. Kenneth Burdett & Ricardo Lagos & Randall Wright, 2002. "Crime, Inequality, and Unemployment, Second Version," PIER Working Paper Archive 03-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Sep 2003.
  3. Gaumont Damien & Schindler Martin & Wright Randall, 2006. "Equilibrium Wage Dispersion: An Example," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(2), pages 1-18, October.
  4. Eckstein, Zvi & Wolpin, Kenneth I, 1990. "Estimating a Market Equilibrium Search Model from Panel Data on Individuals," Econometrica, Econometric Society, Econometric Society, vol. 58(4), pages 783-808, July.
  5. Kenneth Burdett & Randall Wright, 1994. "Two-sided search," Staff Report, Federal Reserve Bank of Minneapolis 169, Federal Reserve Bank of Minneapolis.
  6. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 487-504, July.
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  17. 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, Elsevier, vol. 51(8), pages 1599-1621, November.
  18. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  19. 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, Wiley Blackwell, vol. 59(3), pages 617-24, July.
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  21. Albrecht, James W & Vroman, Susan B, 1998. "Nash Equilibrium Efficiency Wage Distributions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 183-203, February.
  22. Berg, G.J. & Ridder, G., 1993. "An empirical equilibrium search model of the labour market," Serie Research Memoranda 0039, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  23. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
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