Skill or Luck? Search Frictions and Wage Differentials

Tore Ellingsen and Åsa Rosén

No 1, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: The paper seeks to explain a collection of empirical regularities concerning inter- and intra-industrial wage differentials. For example, the model is consistent with the following well established set of observations: (i) After correcting for other variables, the wage of displaced workers is strongly related both to the characteristics of the original firm and the characteristics of the new firm, (ii) wage differentials are correlated across occupations, and (iii) the pattern of wage differentials are similar across countries with different market institutions. Our framework is a search- matching model with heterogeneous worker skills and endogenous wage policies (wage posting or bargaining). The model has equilibria in which firms post different wages. Higher wages attract more able workers on average. For a given posted wage, there may be an interval of worker productivities such that both the worker and the firm are satisfied with the match. Hence, a worker's wage reflects luck as well as skill. Even though the model predicts a correlation between industry characteristics and wage premia, the relationship can not be exploited by policy makers (the Lucas critique applies).

Keywords: Wage differentials; recruiting; adverse selection; search models (search for similar items in EconPapers)
JEL-codes: J31 J41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1994-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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