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Heterogeneity, selection and labor market disparities

We study the incentives to improve ability in a model where heterogeneous firms and workers interact in a labor market characterized by matching frictions and costly screening. When effort in improving ability raises both the mean and the variance of the resulting ability distribution, multiple equilibria may arise. In the high-effort equilibrium, heterogeneity in ability is sufficiently large to induce firms to select the best workers, thereby confirming the belief that effort is important for finding good jobs. In the low-effort equilibrium, ability is not sufficiently dispersed to justify screening, thereby confirming the belief that effort is not so important. The model has implications for wage inequality, the distribution of firm characteristics, sorting patterns between firms and workers, and unemployment rates that can help explaining observed cross-country variation in socio-economic and labor market outcomes.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1402.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1402.

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Date of creation: Oct 2013
Date of revision: Mar 2015
Handle: RePEc:upf:upfgen:1402
Contact details of provider: Web page: http://www.econ.upf.edu/

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