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Title: Frictional Wage Dispersion: A Puzzle?

Citation Type: Working Paper

Publication Year: 2006

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Abstract: This paper demonstrates that the standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a tiny amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. The analysis is centered around a specific measure of wage dispersion the ratio between the average wage and the lowest (reservation) wage paid. We show that in the textbook search and matching models this statistic (the mean-min ratio) can be obtained in closed form as a function of observable variables, without any parametric assumption on the wage offer distribution. Looking at various independent data sources suggests that, empirically, frictional wage dispersion is larger by a factor of 20. We discuss the extent to which three extensions of the model (risk aversion, volatile wages during employment, and on the job search) can improve its performance.

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Authors: Krusell, Per; Violante, Giovanni L.; Hornstein, Andreas

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Data Collections: IPUMS CPS

Topics: Education, Labor Force and Occupational Structure, Poverty and Welfare

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