Equilibrium Wage Distributions

Abstract

This paper analyzes equilibrium in labor markets with costly search.Even in steady state equilibrium, identical labor may receive different wages; this may be the case even when the only source of imperfect information is the inequality of wages which the market is perpetuating.When there are information imperfections arising from (symmetric) differences in non-pecuniary characteristics of jobs and preferences of individuals, there will not in general exist a full employment, zero profit single wage equilibrium.There are, in general, a multiplicity of equilbria.Equilibrium may be characterized by unemployment; in spite of the presence of an excess supply of labor, no firm is willing to hire workers at a lower wage.It knows that if it does so, the quit rate will be higher, and hence turnover costs (training costs) will be higher, so much so that profits will actually be lower.The model thus provides a rationale for real wage rigidity.The model also provides a theory of equilibrium frictional unemployment.Though the constrained optimality (taking explicitly into account the costs associated with obtaining information and search) may entail unemployment and wage dispersion, the levels of unemployment and wage dispersion in the market equilibrium will not, in general, be (constrained) optimaL

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