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American Economic Review: Vol. 101 No. 7 (December 2011)

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Frictional Wage Dispersion in Search Models: A Quantitative Assessment

Article Citation

Hornstein, Andreas, Per Krusell, and Giovanni L. Violante. 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment." American Economic Review, 101(7): 2873-98.

DOI: 10.1257/aer.101.7.2873

Abstract

We propose a new measure of frictional wage dispersion: the mean-min wage ratio. For a large class of search models, we show that this measure is independent of the wage-offer distribution but depends on statistics of labor-market turnover and on preferences. Under plausible preference parameterizations, observed magnitudes for worker flows imply that in the basic search model, and in most of its extensions, frictional wage dispersion is very small. Notable exceptions are some of the most recent models of on-the-job search. Our new measure allows us to rationalize the diverse empirical findings in the large literature estimating structural search models. (JEL D81, D83, J31, J41, J64)

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Authors

Hornstein, Andreas (Reserve Bank of Richmond)
Krusell, Per (Institute for International Economic Studies, Stockholm U)
Violante, Giovanni L. (NYU)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief
J31: Wage Level and Structure; Wage Differentials
J41: Labor Contracts
J64: Unemployment: Models, Duration, Incidence, and Job Search


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