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Wage differentials, discrimination and efficiency

  • Shi, Shouyong

In this paper I construct a search model of a large labor market in which workers are heterogeneous in productivity and (homogeneous) firms post wages and a ranking of workers to direct workers' search. I establish the following results. First, the wage differential is negatively related to productivity when the productivity differential is small, while a positive relationship emerges when the productivity differential is large. Second, as the productivity differential decreases to zero, the reverse wage differential increases and so it remains strictly positive in the limit. Third, high-productivity workers are not discriminated against even when they have a lower wage, because they always have a higher priority in employment and higher expected wage than low-productivity workers. Fourth, the equilibrium is socially efficient, and so the wage differential and the ranking are part of the efficient mechanism. Finally, I provide numerical examples to illustrate the wage distribution.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 4 (May)
Pages: 849-875

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:4:p:849-875
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  1. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  2. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  3. Bowlus, A.J. & Eckstein, Z., 1998. "Discrimination and Skill Differences in an Equilibrium Search Model," Papers 04-98, Tel Aviv.
  4. Black, Dan A, 1995. "Discrimination in an Equilibrium Search Model," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 309-33, April.
  5. 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.
  6. Daron Acemoglu & Robert Shimer, 1998. "Holdups and Efficiency with Search Frictions," Working papers 98-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
  8. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  9. Joseph G. Altonji & Rebecca M. Blank, . "Race and Gender in the Labor Market," IPR working papers 98-18, Institute for Policy Resarch at Northwestern University.
  10. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  11. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  12. Kevin Lang & Michael Manove & William T. Dickens, 2005. "Racial Discrimination in Labor Markets with Posted Wage Offers," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-145, Boston University - Department of Economics.
  13. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
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