Wage Profiles and Income Inequality among Identical Workers: A Simple Formalization
This paper explores the implications of the possible bankruptcies of firms for their own wage schemes and the structure of the labor market using a two-period general equilibrium model. The bankruptcy risk flattens the wage profile of each firm, weakening its incentive effect and thereby making room for the efficiency wage to be used as a supplementary incentive device. This, in turn, stratifies the labor market into the primary market, in which job rationing is observed, and the secondary market, in which job rationing is not observed. A substantial utility differential emerges between those who have found a job in the primary market and those who have not, even though there is no difference in their innate abilities. This differential widens as bankruptcies become more likely. Moreover, the dual structure of the labor market renders the employment size in the primary market too small to attain a social optimum.
|Date of creation:||Mar 2014|
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PIE/CIS Discussion Paper
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