Wage Dispersion and Wage Dynamics within and across Firms

Carlos Carrillo-Tudela and Eric Smith
Working Paper 2009-22
September 2009

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This paper examines wage dispersion and wage dynamics in a stock-flow matching economy with on-the-job search. Under stock-flow matching, job seekers immediately become fully informed about the stock of viable vacancies. If only one option is available, monopsony wages result. With more than one firm bidding, Bertrand wages arise. The initial and expected threat of competition determines the evolution of wages and thereby introduces a novel way of understanding wage differences among similar workers. The resulting wage distribution has an interior mode and prominent, well-behaved tails. The model also generates job-to-job transitions with both wage cuts and jumps.

JEL classification: J31, J63, J64

Key words: wage dispersion, wage dynamics, job search, stock-flow matching

The authors thank Randall Wright, Ken Burdett, and Jean Marc Robin for their many helpful insights. This paper has also benefited from comments and suggestions of participants in seminars at the Universities of Essex, Leicester, Exeter, Basel, Konstanz, and Notre Dame; Humboldt University (Berlin); Rutgers University; Michigan State University; the Federal Reserve Banks of Philadelphia and Atlanta; and participants at the 2007 conference of the Society for Economic Dynamics 2007, the 2007 conference of the European Economic Association, and the 2008 Midwest Macro conference. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Please address questions regarding content to Carlos Carrillo-Tudela, Department of Economics, University of Leicester, Astley Clarke Building, University Road, Leicester, LE1 7RH, United Kingdom, cct9@le.ac.uk, or Eric Smith, Research Department, Federal Reserve Bank of Atlanta and Department of Economics, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ, 44 1206 872756, United Kingdom, esmith@essex.ac.uk.

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