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Endogenous Wage and Capital Dispersion, On-the-Job Search and the Matching Technology

  • Galindo-Rueda, Fernando


    (Office of National Statistics)

This paper presents a new model of endogenous wage and capital dispersion where heterogeneity is driven by entrepreneurial incentives to pay higher wages in order to attract and retain workers. The main contribution of this model is to provide a framework with microeconomic foundations that give rise to matching frictions, which can be used to understand the dynamic features of job-worker flows, wage dispersion and mobility as well as search on the job. The basic model is also extended to endogenise firms’ optimal investment in job-specific capital and search efforts undertaken by both employed and unemployed individuals. The empirical implications of this model are compared to those of the apparently more tractable and indeed, more frequently used aggregate matching technology. Existing differences turn out to be crucial for the empirical identification of the wage offer distribution and may also bias subsequent inferences about underlying search cost parameters.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 625.

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Length: 36 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:iza:izadps:dp625
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  1. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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  9. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
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  18. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  19. Patricia M. Anderson & Simon M. Burgess, 2000. "Empirical Matching Functions: Estimation and Interpretation Using State-Level Data," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 93-102, February.
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