Equilibrium Wage Distributions

Abstract

The observation that different firms charge different prices for what appears to be the same commodity or pay different wages for what appears to be equivalent labour has long been explained in economics by a reference to 'imperfect information'. This paper is concerned with characterising market equilibrium with imperfect information. We do not present a general theory; rather, we develop in some detail an example of importance in its own right -imperfect information in the labour market. Several properties of our example, in particular, the existence of equilibria with price (wage) dispersion, unemployment (excess supply of labour), positive profits, multiple equilibria and the nonoptimality or some of all of the equilibria, are of more general validity; other results may not be. This paper is concerned with two kinds of imperfect information: (a) Individuals may not know the wage paid in any particular firm, or whether there is a vacancy in any particular firm, until they apply for a job.1 (b) There are several characteristics besides the wage rate associated with a job which are important to the individual. Some, like the normal length of a work week, become known when the individual applies for the job; information about other characteristics (e.g. personalities of colleagues) is acquired only gradually. There is one important difference between the two kinds of imperfect in