A Matching Model with Endogenous Skill Requirements

Abstract

In this paper, we construct a model that focuses on the role of skill in the labor market. We consider a labor market in which workers differ in their abilities and jobs differ in their skill requirements. The distribution of worker abilities is exogenous, but we model the choice of skill requirements by firms. High-skill jobs produce more output than low-skill jobs do, but high-skill jobs require high-skill workers and thus are more difficult to fill. We use a matching model together with a Nash bargaining approach to wage setting to determine the equilibrium mix of job types, along with the equilibrium relationship between worker and job characteristics, wages, and unemployment. The model has the property that skill-biased technical change, i.e., an increase in the productivity of the high-skill jobs, leads to an increase in wage inequality both within and across worker types.

Keywords: skills, matching, wages, unemployment

JEL Classification: J64, E24