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Wage Inequality and Job Stability

Ana Luisa Pessoa de Araujo
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Ana Luisa Pessoa de Araujo: Federal Reserve Bank of Minneapolis

No 5, Working Papers from Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute

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.

Keywords: Layoff rates; Earnings inequality; Firm heterogeneity; Matched employer-employee data; Wage differentials; Equilibrium search model (search for similar items in EconPapers)
JEL-codes: E61 J31 J63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
Date: 2017-12-05
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DOI: 10.21034/iwp.5

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