Wage Dispersion in the Search and Matching Model

Abstract

The simplicity of the canonical search and matching model offers many advantages for the purpose of understanding the determinants and dynamics of unemployment. However, the spe cial assumption that a firm is composed of a sin gle worker and employer or that the production technology is linear is limiting. Lars A. Stole and Jeffrey Zwiebel (1996), Asher Wolinsky (2000), and Elhanan Helpman and Oleg Itskhoki (2008) generalize the original model to the case of many workers in a firm with a technology characterized by diminishing returns to labor. They find that all employers pay the same wage in steady state equi librium when only unemployed workers search. I extend their model by allowing for search on the job and show that a unique dispersed wage steady state equilibrium also exists with the prop erty that more productive employers pay more and are larger. Furthermore, inefficient characterizes the single wage equi librium, but employment is lower in the dispersed wage equilibrium because employers face stiffer competition. As a consequence, the dispersed wage equilibria can be more efficient. There is a close relationship between the equi libria of the search and matching model studied in this paper and those of the dynamic monopsony models of Peter A. Diamond (1971), Kenneth Burdett and Kenneth L. Judd (1983), and Burdett and Dale T. Mortensen (1998). The single wage equilibrium is the analogue of the Diamond equi librium while a dispersed wage equilibrium exists when employed workers search for essentially the same reason as in the Burdett-Mortensen model. Namely, there exists a nondegenerate interval of wages and a continuous distribution of vacancies over the interval such that the common