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Exploring the Causes of Frictional Wage Dispersion

Author

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  • Tjaden, Volker

    (University of Bonn)

  • Wellschmied, Felix

    (Universidad Carlos III de Madrid)

Abstract

Standard search models are unreliable for structural inference of the underlying sources of wage inequality because they are inconsistent with observed residual wage dispersion. We address this issue by modeling skill development and duration dependence in unemployment benefits in a random on the job search model featuring two-sided heterogeneity. General human capital and search on the job are the main drivers behind our model's empirical success in replicating wage dispersion (residual and overall). A realistic quantitative appraisal of search efficiencies needs to account for one third of job to job transitions resulting in wage losses. Controlling for them has important implications for the inferred sources of wage inequality. We find that the search friction accounts for around 18 percent of observed wage inequality.

Suggested Citation

  • Tjaden, Volker & Wellschmied, Felix, 2012. "Exploring the Causes of Frictional Wage Dispersion," IZA Discussion Papers 6299, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp6299
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    References listed on IDEAS

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    Cited by:

    1. Carlos Carrillo-Tudela, 2010. "Job Search, Human Capital and Wage Inequality," 2010 Meeting Papers 723, Society for Economic Dynamics.
    2. Ken Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2016. "Wage Inequality: A Structural Decomposition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 20-37, January.
    3. Tamas Papp, 2013. "Frictional wage dispersion with Bertrand competition: an assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 540-552, July.
    4. Marotzke, Petra, 2013. "Job Search and the Age-Inequality Profile," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80007, Verein für Socialpolitik / German Economic Association.
    5. Ken Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2015. "Wage Inequality," Working Papers 42, Peruvian Economic Association.

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    More about this item

    Keywords

    heterogeneity; frictional wage dispersion; search model;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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