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Equilibrium Wage Dispersion: An Example

  • Gaumont Damien

    ()

    (Université Panthéon-Assas (Paris II) and ERMES)

  • Schindler Martin

    ()

    (International Monetary Fund)

  • Wright Randall

    ()

    (University of Pennsylvania)

Search models with wage posting and match-specific heterogeneity generate wage dispersion. Given K values for the match-specific variable, it is known that there are K reservation wages that could be posted, but generically never more than two actually are posted in equilibrium. What is unknown is when we get two wages, and which of the reservation wages are actually posted. For an example with K = 3, we show equilibrium is unique, may have one wage or two, and when there are two, the equilibrium can display any combination of posted reservation wages, depending on parameters. We also show how wages, profits and unemployment depend on productivity.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 2 (October)
Pages: 1-18

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:2:n:11
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  1. Albrecht, James & Axell, Bo, 1983. "An Equilibrium Model of Search Unemployment," Working Papers 83-10, C.V. Starr Center for Applied Economics, New York University.
  2. Elisabeth Curtis & Randall Wright, 2002. "Price setting, price dispersion, and the value of money - or - The law of two prices," Working Paper 0209, Federal Reserve Bank of Cleveland.
  3. Damien Gaumont & Martin Schindler & Randall Wright, 2005. "Alternative Theories of Wage Dispersion," PIER Working Paper Archive 05-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
  5. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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