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Alternative Models of Wage Dispersion
Author:
International Monetary Fund
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Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 064
Language:
English
Publication Date:
01 Mar 2005
DOI:
https://doi.org/10.5089/9781451860832.001
ISBN:
9781451860832
ISSN:
1018-5941
Pages:
25
Keywords:
WP; disp-formula id; bellman equation; reservation wage; wage firm
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We analyze labor market models where the law of one price does not hold-that is, models with equilibrium wage dispersion. We begin by assuming workers are ex ante heterogeneous, and highlight a flaw with this approach: if search is costly, the market shuts down. We then assume workers are homogeneous, but matches are ex post heterogeneous. This model is robust to search costs, and it delivers equilibrium wage dispersion. However, we prove the law of two prices holds: generically, we cannot get more than two wages. We explore several other models, including one combining ex ante and ex post heterogeneity, which is robust and can deliver more than two-point wage distributions.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund