Frictional Wage Dispersion in Search Models: A Quantitative Assessment

Andreas Hornstein, Per Krusell and Giovanni Violante

No 13674, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E24 J24 J31 J6 J64 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-dge and nep-lab
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Published as Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-98, December.

Downloads: (external link)
http://www.nber.org/papers/w13674.pdf (application/pdf)

Related works:
Journal Article: Frictional Wage Dispersion in Search Models: A Quantitative Assessment (2011)
Working Paper: Frictional wage dispersion in search models: a quantitative assessment (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13674

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13674

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().