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Alternative Theories of Wage Dispersion

Listed author(s):
  • Damien Gaumont

    ()

    (Universite Pantheon-Assas (Paris II))

  • Martin Schindler

    ()

    (International Monetary Fund)

  • Randall Wright

    ()

    (Department of Economics, University of Pennsylvania)

We analyze labor market models where the law of one price does not hold; i.e., models with equilibrium wage dispersion. We begin 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 delivers equilibria 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; this model is robust, and can deliver more than two-point wage distributions.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/05-017.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-017.

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Length: 25 pages
Date of creation: 23 Feb 2005
Handle: RePEc:pen:papers:05-017
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  1. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  2. Albrecht, James W & Jovanovic, Boyan, 1986. "The Efficiency of Search under Competition and Monopsony," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1246-1257, December.
  3. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, vol. 136(2), pages 531-564, February.
  4. P. Diamond, 1980. "Mobility Costs, Frictional Unemployment and Efficiency," Working papers 257, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Damien Gaumont & Martin Schindler & Randall Wright, 2006. "Equilibrium Wage Dispersion: An Example," 2006 Meeting Papers 147, Society for Economic Dynamics.
  6. Jafarey, Saqib & Masters, Adrian, 2003. " Output, Prices, and the Velocity of Money in Search Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 871-888, December.
  7. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Gaumont, Damien & Schindler, Martin & Wright, Randall, 2006. "Alternative theories of wage dispersion," European Economic Review, Elsevier, vol. 50(4), pages 831-848, May.
  9. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 851-873, October.
  10. James W. Albrecht & Susan B. Vroman, 1992. "Non-Existence of Single-Wage Equilibria in Search Models with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 617-624.
  11. Ken Burdett & Randall Wright, 1998. "Two-Sided Search with Nontransferable Utility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 220-245, January.
  12. Berg, G.J. & Ridder, G., 1993. "An empirical equilibrium search model of the labour market," Serie Research Memoranda 0039, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  13. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00357751, HAL.
  14. Albrecht, James W & Vroman, Susan B, 1998. "Nash Equilibrium Efficiency Wage Distributions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 183-203, February.
  15. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
  16. Kenneth Burdett & Ricardo Lagos & Randall Wright, 2003. "Crime, Inequality, and Unemployment," American Economic Review, American Economic Association, vol. 93(5), pages 1764-1777, December.
  17. Richard D. MacMinn, 1980. "Job Search and the Labor Dropout Problem Reconsidered," The Quarterly Journal of Economics, Oxford University Press, vol. 95(1), pages 69-87.
  18. 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 257-273, May.
  19. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
  20. Peter Diamond, 1985. "Consumer Differences and Prices in a Search Model," Working papers 404, Massachusetts Institute of Technology (MIT), Department of Economics.
  21. 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.
  22. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
  23. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  24. Elisabeth Curtis & Randall Wright, 2002. "Price setting, price dispersion, and the value of money - or - The law of two prices," Working Paper 0209, Federal Reserve Bank of Cleveland.
  25. Masters, Adrian M, 1999. "Wage Posting in Two-Sided Search and the Minimum Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 809-826, November.
  26. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
  27. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May.
  28. Eckstein, Zvi & Wolpin, Kenneth I, 1990. "Estimating a Market Equilibrium Search Model from Panel Data on Individuals," Econometrica, Econometric Society, vol. 58(4), pages 783-808, July.
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