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Alternative Models of Wage Dispersion

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  • International Monetary Fund

Abstract

We analyze labor market models where the law of one price does not hold-that is, models with equilibrium wage dispersion. We begin by assuming workers are ex ante heterogeneous, and highlight a flaw with this approach: if search is costly, the market shuts down. We then assume workers are homogeneous, but matches are ex post heterogeneous. This model is robust to search costs, and it delivers equilibrium wage dispersion. However, we prove the law of two prices holds: generically, we cannot get more than two wages. We explore several other models, including one combining ex ante and ex post heterogeneity, which is robust and can deliver more than two-point wage distributions.

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  • International Monetary Fund, 2005. "Alternative Models of Wage Dispersion," IMF Working Papers 2005/064, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2005/064
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    References listed on IDEAS

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    1. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, vol. 136(2), pages 531-564, February.
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    8. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g8grh35j2 is not listed on IDEAS
    9. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Post-Print hal-03458567, HAL.
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    Cited by:

    1. International Monetary Fund, 2006. "Equilibrium Wage Dispersion: An Example," IMF Working Papers 2006/019, International Monetary Fund.
    2. van den Berg, Gerard J. & van Vuuren, Aico, 2010. "The effect of search frictions on wages," Labour Economics, Elsevier, vol. 17(6), pages 875-885, December.
    3. Gaumont Damien & Schindler Martin & Wright Randall, 2006. "Equilibrium Wage Dispersion: An Example," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-18, October.

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