Equilibrium Wage Dispersion with Worker and Employer Heterogeneity

Abstract

We construct and estimate an equilibrium search model with on-the-job-search. Firms make take-it-or-leave-it wage offers to workers conditional on their characteristics and they can respond to the outside job offers received by their employees. Unobserved worker productive heterogeneity is introduced in the form of cross-worker differences in a "competence" parameter. On the other side of the market, Þrms also are heterogeneous with respect to their marginal productivity of labor. The model delivers a theory of steady-state wage dispersion driven by heterogenous worker abilities and Þrm productivities, as well as by matching frictions. The structural model is estimated using matched employer and employee French panel data. The exogenous distributions of worker and Þrm heterogeneity components are non parametrically estimated. We use this structural estimation to provide a decomposition of cross-employee wage variance. We Þnd that the share of the cross-sectional wage variance that is explained by person effects varies across skill groups. SpeciÞcally, this share lies close to 40% for high-skilled white collars, and quickly decreases to 0% as the observed skill level decreases. The contribution of market imperfections to wage dispersion is typically around 50%.

Unemployment cycles

“…The model economy is a simplified version of the Postel-Vinay and Robin (2002) model of on-the-job search with two productivity types and a highly stylized form of job ladder. It is aimed to capture the main forces of search models with on-the-job search and sorting (à la Shimer and Smith (2000)): a worker who already has a job will only move to a new job if the new job is more productive.…”

“…The most natural way of modeling this would be exactly as in Postel-Vinay and Robin (2002) 9 with the random arrival of job types of high and low productivity. We do analyze that model in Appendix B and can show that the multiplicity survives, but it is much less tractable and notationally more cumbersome.…”

A Model of Job and Worker Flows

“…One strand of this literature documents the sheer size of these flows, while another focuses on cross-country differences and tries to relate them to differences in labor market regulations. 33 Our model can help organize many of the empirical findings. To illustrate, we first carry out in the theory, the same types of accounting exercises as Davis and Haltiwanger have pioneered with actual data.…”

Training, search and wage dispersion

“…17 For example, when training cost is neither too high nor too low. 18 A formal discussion of wage cuts over job-to-job transition is available in the online appendix. 19 As shown later, in the general case where …rms choose training intensities, …rms with higher v will o¤er more training; and workers will move to jobs with more training than their current jobs.…”