Wages, Unemployment and Inequality with Heterogeneous Firms and Workers

Elhanan Helpman, Oleg Itskhoki and Stephen James Redding

No 14122, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we develop a multi-sector general equilibrium model of firm heterogeneity, worker heterogeneity and labor market frictions. We characterize the distributions of employment, unemployment, wages and income within and between sectors as a function of structural parameters. We find that greater firm heterogeneity increases unemployment, wage inequality and income inequality, whereas greater worker heterogeneity has ambiguous effects. We also find that labor market frictions have non-monotonic effects on aggregate unemployment and inequality through within- and between-sector components. Finally, high-ability workers have the lowest unemployment rates but the greatest wage inequality, and income inequality is lowest for intermediate ability. Although these results are interesting in their own right, the main contribution of the paper is in providing a framework for analyzing these types of issues.

JEL-codes: D21 D24 D31 D43 J31 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-ltv
Date: Written 2008-06
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