Wages, Unemployment and Inequality with Heterogeneous Firms and Workers

63 Pages Posted: 30 Jun 2008 Last revised: 4 Aug 2010

See all articles by Elhanan Helpman

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Oleg Itskhoki

Princeton University - Department of Economics

Stephen J. Redding

Princeton University

Date Written: June 2008

Abstract

In this paper we develop a multi-sector general equilibrium model of firm heterogeneity, worker heterogeneity and labor market frictions. We characterize the distributions of employment, unemployment, wages and income within and between sectors as a function of structural parameters. We find that greater firm heterogeneity increases unemployment, wage inequality and income inequality, whereas greater worker heterogeneity has ambiguous effects. We also find that labor market frictions have non-monotonic effects on aggregate unemployment and inequality through within- and between-sector components. Finally, high-ability workers have the lowest unemployment rates but the greatest wage inequality, and income inequality is lowest for intermediate ability. Although these results are interesting in their own right, the main contribution of the paper is in providing a framework for analyzing these types of issues.

Suggested Citation

Helpman, Elhanan and Itskhoki, Oleg and Redding, Stephen J., Wages, Unemployment and Inequality with Heterogeneous Firms and Workers (June 2008). NBER Working Paper No. w14122. Available at SSRN: https://ssrn.com/abstract=1152665

Elhanan Helpman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Oleg Itskhoki

Princeton University - Department of Economics ( email )

Fisher 306
Princeton, NJ 08544-1021
United States
+1 (609) 258-5493 (Phone)

HOME PAGE: http://www.princeton.edu/~itskhoki

Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

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