Job Matching and the Wage Distribution

This paper brings together the microeconomic-labor and the macroeconomic-equilibrium views of matching in labor markets. We nest a job matching model à la Jovanovic (1984) into a Mortensen and Pissarides (1994)-type equilibrium search environment. The resulting framework preserves the implications of job matching theory for worker turnover and wage dynamics, and it also allows for aggregation and general equilibrium analysis. We obtain two new equilibrium implications of job matching and search frictions for wage inequality. First, learning about match quality and worker turnover map Gaussian output noise into an ergodic wage distribution of empirically accurate shape: unimodal, skewed, with a Paretian right tail. Second, high idiosyncratic productivity risk hinders learning and sorting, and reduces wage inequality. The equilibrium solutions for the wage distribution and for the aggregate worker flows-quits to unemployment and to other jobs, displacements, hires-provide the likelihood function of the model in closed form. Copyright The Econometric Society 2005.