Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

Christopher Taber and Rune Vejlin
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Christopher Taber: University of Wisconsin-Madison

No 566, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The four most important models of post-schooling wage determination in economics are almost certainly human capital, the Roy model, the compensating differentials model, and the search model. All four lead to wage heterogeneity. While separating human capital accumulation from the others is quite common, we know remarkably little about the relative importance of the other three sources of inequality. The key aspect of the Roy model is comparative advantage in which some workers earn more than others as a result of different skill levels at labor market entry. Workers choose the job for which they achieve the highest level of earnings. By contrast, in a compensating wage differentials model a worker is willing to be paid less in order to work on a job that they enjoy more. Thus, workers with identical talent can earn different salaries. Finally, workers may have had poor luck in finding their ideal job. This type of search friction can also lead to heterogeneity in earnings as some workers may work for higher wage firms. In short, one worker may earn more than another a) because he has more talent at labor market entry (Roy Model), b) because he has accu- mulated more human capital while working (human capital), c) because he has chosen more unpleasant job (compensating differentials), or d) because he has had better luck in finding a good job (search frictions). The goal of this work is to uncover the contribution of these different components to overall earnings inequality.

Date: 2012
New Economics Papers: this item is included in nep-dge, nep-hrm and nep-lma
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Estimation of a Roy/Search/Compensating Differential Model of the Labor Market (2020)
Working Paper: Estimation of a Roy/Search/Compensating Differential Model of the Labor Market (2016)
Working Paper: Estimation of a Roy/Search/Compensating Differential Model of the Labor Market (2016)
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