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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. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers 74, CREFE, Université du Québec à Montréal.
  2. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
  6. repec:dgr:uvatin:2001080 is not listed on IDEAS
  7. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  8. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  9. 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.
  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. Joel Shapiro, 2002. "Wage inequality in a frictional labor market," Economics Working Papers 614, Department of Economics and Business, Universitat Pompeu Fabra.
  12. 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.
  13. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  14. Kevin Lang & Michael Manove & William T. Dickens, 2005. "Racial Discrimination in Labor Markets with Posted Wage Offers," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-145, Boston University - Department of Economics.
  15. repec:dgr:uvatin:20010080 is not listed on IDEAS
  16. Acemoglu, Daron & Shimer, Robert, 2000. "Wage and Technology Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 585-607, October.
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