Frictional Wage Dispersion in Search Models: A Quantitative Assessment / Andreas Hornstein, Per Krusell, Giovanni L. Violante.

Format:

Book

Author/Creator:

Hornstein, Andreas.

Contributor:

National Bureau of Economic Research.

Krusell, Per.

Violante, Giovanni L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13674.

NBER working paper series no. w13674

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Frictional Wage Dispersion in Search Models

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion -- the ratio between the average wage and the lowest (reservation) wage paid. We show that in a large class of search and matching models this statistic (the "mean-min ratio") can be obtained in closed form as a function of observable variables (i.e., the interest rate, the value of leisure, and statistics of labor market turnover). Various independent data sources suggest that actual residual wage dispersion (i.e., inequality among observationally similar workers) exceeds the model's prediction by a factor of 20. We discuss three extensions of the model (risk aversion, volatile wages during employment, and on-the-job search) and find that, in their simplest versions, they can improve its performance, but only modestly. We conclude that either frictions account for a tiny fraction of residual wage dispersion, or the standard model needs to be augmented to confront the data. In particular, the last generation of models with on-the-job search appears promising.

Notes:

Print version record

November 2007.