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Wage Inequality in a Frictional Labor Market

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  • Joel Shapiro

Abstract

Wage inequality in the United States has grown substantially in the past two decades. Standard supply-demand analysis in the empirics of inequality (e.g. Katz and Murphy (1992)) indicates that we may attribute some of this trend to an outward shift in the demand for high skilled labor. In this paper we examine a simple static channel in which the wage premium for skill may grow – increased firm entry. We consider a model of wage dispersion where there are two types of workers and homogeneous firms must set wages and preferences for what type of worker they would like to hire. We find that both the wage differential and the demand for high skill workers can increase with the proportion of high skill workers – these high skill workers therefore "create" their own demand without exogenous factors. In addition, within group wage inequality can increase in step with the between group wage inequality. Simulations of the model are provided in order to compare the findings with empirical results.

Suggested Citation

  • Joel Shapiro, 2015. "Wage Inequality in a Frictional Labor Market," Working Papers 94, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:94
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    References listed on IDEAS

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    2. Joel Shapiro, 2002. "Wage inequality in a frictional labor market," Economics Working Papers 614, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Ben Heijdra & Jenny Ligthart, 2009. "Labor tax reform, unemployment, and search," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(1), pages 82-104, February.

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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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