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Wage Inequality in a Frictional Labor Market

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Author Info
Joel Shapiro ()

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Abstract

Wage inequality in the United States has grown substantially in the past two decades. Standard supply-demand analysis in the empirics of inequality (e.g.Katz and Murphy (1992)) indicates that we may attribute some of this trend to an outward shift in the demand for high skilled labor. In this paper we examine a simple static channel in which the wage premium for skill may grow -increased firm entry. We consider a model of wage dispersion where there are two types of workers and homogeneous firms must set wages and preferences for what type of worker they would like to hire. We find that both the wage differential and the demand for high skill workers can increase with the proportion of high skill workers -these high skill workers therefore 'create' their own demand without exogenous factors. In addition, within group wage inequality can increase in step with the between group wage inequality. Simulations of the model are provided in order to compare the findings with empirical results.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 614.

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Date of creation: Apr 2002
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Handle: RePEc:upf:upfgen:614

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Wage posting wage inequality search

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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  1. Eli Berman & John Bound & Zvi Griliches, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kevin Lang & Michael Manove & William T. Dickens, 2005. "Racial Discrimination in Labor Markets with Posted Wage Offers," American Economic Review, American Economic Association, vol. 95(4), pages 1327-1340, September. [Downloadable!] (restricted)
    Other versions:
  3. Acemoglu, Daron, 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," CEPR Discussion Papers 1459, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July. [Downloadable!] (restricted)
  6. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  7. Acemoglu, Daron & Shimer, Robert, 2000. "Wage and Technology Dispersion," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 585-607, October.
  8. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September. [Downloadable!] (restricted)
  9. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June. [Downloadable!] (restricted)
  10. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June. [Downloadable!] (restricted)
  11. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change And Wage Inequality," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1055-1089, November. [Downloadable!] (restricted)
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  12. James W. Albrecht & Pieter A. Gautier & Susan B. Vroman, 2001. "Matching with Multiple Applications," Tinbergen Institute Discussion Papers 01-080/3, Tinbergen Institute. [Downloadable!]
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