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On the Determinants of the Skill Premium in Wages

  • Timo Vesala
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    We study the determinants of the skill premium in a matching model where wages are set in bilateral meetings between workers and firms. As a novelty, disagreeing parties do not have to separate immediately, but they may opt to wait for competing agents to arrive. This waiting option is disproportionately valuable for high-skilled workers because they are better protected against competition. This gives rise to a wage schedule with increasing skill premia. The model can be seen to capture, e.g., the consequences of market decentralization, or deunionization, and it may help explain the observed Europe-U.S. differences in wage structure.

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    Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

    Volume (Year): 164 (2008)
    Issue (Month): 2 (June)
    Pages: 195-210

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    Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200806)164:2_195:otdots_2.0.tx_2-u
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    1. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
    2. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    3. Dan Devroye & Richard Freeman, 2002. "Does Inequality in Skills Explain Inequality of Earnings Across Advanced Countries?," CEP Discussion Papers dp0552, Centre for Economic Performance, LSE.
    4. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
    5. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
    6. Robert E. Hall, 1978. "A Theory of the Natural Unemployment Rate and the Duration of Employment," NBER Working Papers 0251, National Bureau of Economic Research, Inc.
    7. Kultti, Klaus, 2000. "About bargaining power," Economics Letters, Elsevier, vol. 69(3), pages 341-344, December.
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