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Wage inequality in a frictional labor market

  • Joel Shapiro

Wage inequality in the United States has grown substantially in the past two decades. Standard supply-demand analysis in the empirics of inequality (e.g.Katz and Murphy (1992)) indicates that we may attribute some of this trend to an outward shift in the demand for high skilled labor. In this paper we examine a simple static channel in which the wage premium for skill may grow -increased firm entry. We consider a model of wage dispersion where there are two types of workers and homogeneous firms must set wages and preferences for what type of worker they would like to hire. We find that both the wage differential and the demand for high skill workers can increase with the proportion of high skill workers -these high skill workers therefore 'create' their own demand without exogenous factors. In addition, within group wage inequality can increase in step with the between group wage inequality. Simulations of the model are provided in order to compare the findings with empirical results.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 614.

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Date of creation: Apr 2002
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Handle: RePEc:upf:upfgen:614
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
  2. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Joel Shapiro, 2003. "Wage Inequality in a Frictional Labor Market," Working Papers 94, Barcelona Graduate School of Economics.
  4. repec:dgr:uvatin:2001080 is not listed on IDEAS
  5. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  6. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
  7. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  8. Kevin Lang & Michael Manove & William T. Dickens, 2005. "Racial Discrimination in Labor Markets with Posted Wage Offers," American Economic Review, American Economic Association, vol. 95(4), pages 1327-1340, September.
  9. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  10. Albrecht, James W. & Gautier, Pieter A. & Vroman, Susan B., 2003. "Matching with multiple applications," Economics Letters, Elsevier, vol. 78(1), pages 67-70, January.
  11. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
  12. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  13. Acemoglu, Daron & Shimer, Robert, 2000. "Wage and Technology Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 585-607, October.
  14. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
  15. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
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