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Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

Author

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  • Christopher Taber

    (University of Wisconsin-Madison)

  • Rune Vejlin

    (Aarhus University)

Abstract

The four most important models of post-schooling wage determination in economics are almost certainly human capital, the Roy model, the compensating differentials model, and the search model. All four lead to wage heterogeneity. While separating human capital accumulation from the others is quite common, we know remarkably little about the relative importance of the other three sources of inequality. The key aspect of the Roy model is comparative advantage in which some workers earn more than others as a result of different skill levels at labor market entry. Workers choose the job for which they achieve the highest level of earnings. By contrast, in a compensating wage differentials model a worker is willing to be paid less in order to work on a job that they enjoy more. Thus, workers with identical talent can earn different salaries. Finally, workers may have had poor luck in finding their ideal job. This type of search friction can also lead to heterogeneity in earnings as some workers may work for higher wage firms. In short, one worker may earn more than another a) because he has more talent at labor market entry (Roy Model), b) because he has accu- mulated more human capital while working (human capital), c) because he has chosen more unpleasant job (compensating differentials), or d) because he has had better luck in finding a good job (search frictions). The goal of this work is to uncover the contribution of these different components to overall earnings inequality.

Suggested Citation

  • Christopher Taber & Rune Vejlin, 2012. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," 2012 Meeting Papers 566, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:566
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    References listed on IDEAS

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    Cited by:

    1. Alexandre Mas & Amanda Pallais, 2017. "Valuing Alternative Work Arrangements," American Economic Review, American Economic Association, vol. 107(12), pages 3722-3759, December.
    2. Ralph Stinebrickner & Todd Stinebrickner & Paul Sullivan, 2019. "Job Tasks, Time Allocation, and Wages," Journal of Labor Economics, University of Chicago Press, vol. 37(2), pages 399-433.
    3. Clement Joubert, 2015. "Pension Design With A Large Informal Labor Market: Evidence From Chile," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 673-694, May.
    4. Isaac Sorkin, 2018. "Ranking Firms Using Revealed Preference," The Quarterly Journal of Economics, Oxford University Press, vol. 133(3), pages 1331-1393.
    5. Christian Giødesen Lund & Rune Vejlin, 2015. "Documenting and Improving the Hourly Wage Measure in the Danish IDA Database," Economics Working Papers 2015-06, Department of Economics and Business Economics, Aarhus University.
    6. Haoran He & David Neumark & Qian Weng, 2019. "Do Workers Value Flexible Jobs? A Field Experiment," NBER Working Papers 25423, National Bureau of Economic Research, Inc.
    7. Torben Sørensen & Rune Vejlin, 2013. "The importance of worker, firm and match effects in the formation of wages," Empirical Economics, Springer, vol. 45(1), pages 435-464, August.
    8. Haoran He & David Neumark & Qian Weng, 2019. "Do Workers Value Flexible Jobs? A Field Experiment on Compensating Differentials," Natural Field Experiments 00667, The Field Experiments Website.
    9. José Pulido & Tomasz Swiecki, 2019. "Barriers to Mobility or Sorting? Sources and Aggregate Implications of Income Gaps across Sectors and Locations in Indonesia," 2019 Meeting Papers 1298, Society for Economic Dynamics.
    10. Morchio, Iacopo & Moser, Christian, 2018. "The Gender Pay Gap: Micro Sources and Macro Consequences," MPRA Paper 99276, University Library of Munich, Germany, revised 24 Mar 2020.
    11. Vejlin, Rune Majlund & Veramendi, Gregory, 2019. "Sufficient Statistics for Frictional Wage Dispersion and Growth," IZA Discussion Papers 12387, Institute of Labor Economics (IZA).
    12. Rune Vejlin, 2013. "Residential Location, Job Location, and Wages: Theory and Empirics," LABOUR, CEIS, vol. 27(2), pages 115-139, June.
    13. Kumar, Krishna B. & Mahmud, Minhaj & Nataraj, Shanthi & Cho, Yoon Y., 2019. "Employer and Employee Preferences for Worker Benefits: Evidence from a Matched Survey on the Bangladesh Informal Sector," IZA Discussion Papers 12064, Institute of Labor Economics (IZA).
    14. Carpenter, Jeffrey & Hans Matthews, Peter & Robbett, Andrea, 2017. "Compensating differentials in experimental labor markets," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 69(C), pages 50-60.
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    16. Minhaj Mahmud & Italo A. Gutierrez & Krishna B. Kumar & Shanthi Nataraj, 2017. "What Aspects of Formality Do Workers Value? Evidence from a Choice Experiment in Bangladesh," Working Papers WR-1197, RAND Corporation.
    17. Ransom, Tyler, 2019. "Labor Market Frictions and Moving Costs of the Employed and Unemployed," IZA Discussion Papers 12139, Institute of Labor Economics (IZA).
    18. Emmanuele Bobbio & Henning Bunzel, 2018. "The Danish Matched Employer-Employee Data," Economics Working Papers 2018-03, Department of Economics and Business Economics, Aarhus University.
    19. Hugo Jales & Zhengfei Yu, 2020. "Labor Market Policies in a Roy-Rosen Bargaining Economy," Center for Policy Research Working Papers 231, Center for Policy Research, Maxwell School, Syracuse University.
    20. Ismail Baydur & Toshihiko Mukoyama, 2020. "Job Duration and Match Characteristics over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 33-53, July.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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