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Sources of earnings inequality: Estimates from an on-the-job search model of the US labor market

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  • Flabbi, Luca
  • Leonardi, Marco

Abstract

Since the early 1980s the labor market in the United States has seen a substantial increase in earnings dispersion. We study the issue by developing an on-the-job search model of the US labor market that allows for wage and employment mobility as a result of optimal individual behavior. We estimate its structural parameters on PSID data at different points in time to clarify the sources of the evolution of earnings inequality and instability between 1987 and 1996. This procedure allows to: compute lifetime measure of inequality on top of the usual cross-sectional measure of inequality and provide counterfactual experiments that evaluate the contribution of different parameters to changes over time by taking into account some equilibrium effects. We find that the increase in lifetime inequality and in cross-sectional inequality have been generated by different sources and that these sources are different by skills: changes in the wage offer distribution are the main determinant of the increase in inequality for skilled workers while both mobility changes and wage offer distribution changes are needed to explain changes for the unskilled.

Suggested Citation

  • Flabbi, Luca & Leonardi, Marco, 2010. "Sources of earnings inequality: Estimates from an on-the-job search model of the US labor market," European Economic Review, Elsevier, vol. 54(6), pages 832-854, August.
  • Handle: RePEc:eee:eecrev:v:54:y:2010:i:6:p:832-854
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Flabbi, Luca & Mabli, James, 2012. "Household Search or Individual Search: Does It Matter? Evidence from Lifetime Inequality Estimates," IZA Discussion Papers 6908, Institute for the Study of Labor (IZA).
    2. Bobba, Matteo & Flabbi, Luca & Levy, Santiago, 2017. "Labor Market Search, Informality and Schooling Investments," TSE Working Papers 17-867, Toulouse School of Economics (TSE).
    3. repec:eee:labeco:v:46:y:2017:i:c:p:26-46 is not listed on IDEAS
    4. Tejada, Mauricio M., 2016. "Lifetime inequality measures for an emerging economy: The case of Chile," Labour Economics, Elsevier, vol. 42(C), pages 1-15.
    5. Mecikovsky, Ariel & Wellschmied, Felix, 2016. "Wage Risk, Employment Risk and the Rise in Wage Inequality," IZA Discussion Papers 10451, Institute for the Study of Labor (IZA).
    6. David Turchick, 2014. "Job Search and Earnings Mobility," Working Papers, Department of Economics 2014_16, University of São Paulo (FEA-USP).

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