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Wage Differentials, Discrimination and Efficiency

Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: In this paper I construct a search model of a large labor market in which workers are heterogeneous in productivity and (homogeneous) firms post wages and a ranking of workers to direct workers' search. I establish the following results. First, the wage differential is negatively related to productivity when the productivity differential is small, while a positive relationship emerges when the productivity differential is large. Second, as the productivity differential decreases to zero, the reverse wage differential increases and so it remains strictly positive in the limit. Third, high-productivity workers are not discriminated against even when they have a lower wage, because they always have a higher priority in employment and higher expected wage than low-productivity workers. Fourth, the equilibrium is socially efficient, and so the wage differential and the ranking are part of the efficient mechanism. Finally, I provide numerical examples to illustrate the wage distribution.

Keywords: Search; Wage Differential; Discrimination. (search for similar items in EconPapers)
JEL-codes: J3 J6 J7 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2006-02-13
New Economics Papers: this item is included in nep-bec, nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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