A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology

Shouyong Shi

The Review of Economic Studies, 2002, vol. 69, issue 2, 467-491

Abstract: In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill-biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high-tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low-tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between-skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill-biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity. Copyright 2002, Wiley-Blackwell.

Date: 2002
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