Equilibrium Wage Dispersion with Worker and Employer Heterogeneity

79 Pages Posted: 23 Oct 2002

See all articles by Fabien Postel-Vinay

Fabien Postel-Vinay

University of Bristol; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; Centre for Structural Econometrics (CSE)

Jean-Marc Robin

École Normale Supérieure (ENS) - Laboratoire d'Economie Theorique et Appliquee (LEA); National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); French National Institute for Agricultural Research (INRA); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: September 2002

Abstract

We construct and estimate an equilibrium search model with on-the-job-search. Firms make take-it-or-leave-it wage offers to workers conditional on their characteristics and they can respond to the outside job offers received by their employees. Unobserved worker productive heterogeneity is introduced in the form of cross-worker differences in a 'competence' parameter. On the other side of the market, firms also are heterogeneous with respect to their marginal productivity of labor. The model delivers a theory of steady-state wage dispersion driven by heterogenous worker abilities and firm productivities, as well as by matching frictions. The structural model is estimated using matched employer and employee French panel data. The exogenous distributions of worker and firm heterogeneity components are non-parametrically estimated. We use this structural estimation to provide a decomposition of cross-employee wage variance. We find that the share of the cross-sectional wage variance that is explained by person effects varies across skill groups. Specifically, this share lies close to 40% for high-skilled white collars, and quickly decreases to 0% as the observed skill level decreases. The contribution of market imperfections to wage dispersion is typically around 50%.

Keywords: Labour market frictions, wage dispersion, log wage variance decomposition

JEL Classification: J31, J41, J64

Suggested Citation

Postel-Vinay, Fabien and Robin, Jean-Marc, Equilibrium Wage Dispersion with Worker and Employer Heterogeneity (September 2002). CEPR Discussion Paper No. 3548. Available at SSRN: https://ssrn.com/abstract=342821

Fabien Postel-Vinay (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Structural Econometrics (CSE) ( email )

Department of Economics, University of Bristol
8 Woodland Road
Bristol, BS8 1TN
United Kingdom

Jean-Marc Robin

École Normale Supérieure (ENS) - Laboratoire d'Economie Theorique et Appliquee (LEA) ( email )

48 boulevard Jourdan
75014 Paris
France
+33 1 4313 6365 (Phone)
+33 1 4313 6362 (Fax)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

15 Boulevard Gabriel Peri
15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

French National Institute for Agricultural Research (INRA)

147, rue de l'Universite
Paris Cedex 07, 78-Yvelines 75338
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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