Wage Inequality and Job Stability

Ana Luisa Pessoa Araujo
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Ana Luisa Pessoa Araujo: University of Minnesota

No 117, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: How much wage inequality in Brazil is caused by firing costs? To answer this question, I develop and estimate a general equilibrium search and matching model with heterogeneous layoff rates among firms. Using matched employer-employee data from Brazil, I estimate the model, and I find that it replicates the observed residual wage inequality in the data. I simulate a counterfactual removal of existing firing costs, and I find that residual wage inequality drops by 26% as measured by wage variance and by 4.4% as measured by the p95-p5 ratio among 25- to 55-year-old males working in the private sector with at most a high school degree. Worker welfare among this subgroup of households increases by almost 1% in response to the abolishment of firing costs.

Date: 2018
New Economics Papers: this item is included in nep-dge
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