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Unemployment, Labor Market Transitions, and Residual Wage Dispersion

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  • Fitzenberger, Bernd
  • Garloff, Alfred
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    Abstract

    It is commonplace in the debate on Germany?s labor market problems to argue that high unemployment and low wage dispersion are related. This paper analyses the relationship between unemployment and residual wage dispersion for individuals with comparable attributes. In the conventional neoclassical point of view, wages are determined by the marginal product of the workers. Accordingly, increases in union minimum wages result in a decline of residual wage dispersion and higher unemployment. A competing view regards wage dispersion as the outcome of search frictions and the associated monopsony power of the firms. Accordingly, an increase in search frictions causes both higher unemployment and higher wage dispersion. The empirical analysis attempts to discriminate between the two hypotheses for West Germany analyzing the relationship between wage dispersion and both the level of unemployment as well as the transition rates between different labor market states. The findings are not completely consistent with either theory. However, as predicted by search theory, one robust result is that unemployment by cells is not negatively correlated with the within?cell wage dispersion. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-04.

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    Date of creation: 2005
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    Handle: RePEc:zbw:zewdip:2895

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    Related research

    Keywords: search friction; labor demand; labor market transitions; wages;

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    References

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    1. Rosholm, Michael & Svarer, Michael, 2004. "Endogenous wage dispersion in a search-matching model," Labour Economics, Elsevier, vol. 11(5), pages 623-645, October.
    2. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
    3. Gruetter, Max & Lalive, Rafael, 2004. "The Importance of Firms in Wage Determination," IZA Discussion Papers 1367, Institute for the Study of Labor (IZA).
    4. Bontemps, C. & Robin, J.M. & van den Berg, G.J., 1998. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Non-Parametric Estimation," Papers 98-07, Centre for Labour Market and Social Research, Danmark-.
    5. Lauer, Charlotte, 2003. "Education and Unemployment: A French-German Comparison," ZEW Discussion Papers 03-34, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
    7. Berg, G.J. & Ridder, G., 1993. "Estimating an equilibrium search model from wage data," Serie Research Memoranda 0040, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
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    Cited by:
    1. Ronald Bachmann, 2005. "Labour Market Dynamics in Germany: Hirings, Separations, and Job-to-Job Transitions over the Business Cycle," SFB 649 Discussion Papers SFB649DP2005-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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