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Skill or Luck? Search Frictions and Wage Differentials

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  • Ellingsen, Tore

    () (Dept. of Economics, Stockholm School of Economics)

  • Rosen, Åsa

Abstract

The paper seeks to explain a collection of empirical regularities concerning inter- and intra-industrial wage differentials. For example, the model is consistent with the following well established set of observations: (i) After correcting for other variables, the wage of displaced workers is strongly related both to the characteristics of the original firm and the characteristics of the new firm, (ii) wage differentials are correlated across occupations, and (iii) the pattern of wage differentials are similar across countries with different market institutions. Our framework is a search- matching model with heterogeneous worker skills and endogenous wage policies (wage posting or bargaining). The model has equilibria in which firms post different wages. Higher wages attract more able workers on average. For a given posted wage, there may be an interval of worker productivities such that both the worker and the firm are satisfied with the match. Hence, a worker's wage reflects luck as well as skill. Even though the model predicts a correlation between industry characteristics and wage premia, the relationship can not be exploited by policy makers (the Lucas critique applies).

Suggested Citation

  • Ellingsen, Tore & Rosen, Åsa, 1994. "Skill or Luck? Search Frictions and Wage Differentials," SSE/EFI Working Paper Series in Economics and Finance 1, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0001
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1989. "A Theory of Wage Dispersion and Job Market Segmentation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 121-137.
    2. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Interindustry Wage Differentials Justify Strategic Trade Policy?," NBER Chapters,in: Trade Policies for International Competitiveness, pages 85-124 National Bureau of Economic Research, Inc.
    3. Bester, Helmut, 1994. "Price commitment in search markets," Journal of Economic Behavior & Organization, Elsevier, vol. 25(1), pages 109-120, September.
    4. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-1059, October.
    5. Robert Gibbons & Lawrence Katz, 1992. "Does Unmeasured Ability Explain Inter-Industry Wage Differentials?," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 515-535.
    6. William T. Dickens & Kevin Lang, 1992. "Labor Market Segmentation Theory: Reconsidering the Evidence," NBER Working Papers 4087, National Bureau of Economic Research, Inc.
    7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    8. Weiss, Andrew W, 1980. "Job Queues and Layoffs in Labor Markets with Flexible Wages," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 526-538, June.
    9. repec:fth:harver:1517 is not listed on IDEAS
    10. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-840, October.
    11. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    12. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc.
    13. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    14. Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
    15. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. Main, Brian G M & Reilly, Barry, 1993. "The Employer Size-Wage Gap: Evidence for Britain," Economica, London School of Economics and Political Science, vol. 60(238), pages 125-142, May.
    17. Sattinger, Michael, 1995. "Search and the Efficient Assignment of Workers to Jobs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 283-302, May.
    18. Erica L. Groshen, 1991. "Sources of Intra-Industry Wage Dispersion: How Much Do Employers Matter?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 869-884.
    19. Kevin Lang, 1991. "Persistent Wage Dispersion and Involuntary Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 181-202.
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      Keywords

      Wage differentials; recruiting; adverse selection; search models;

      JEL classification:

      • 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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