Working Paper: CEPR ID: DP1572
Authors: Daron Acemoglu; Robert Shimer
Abstract: In market economies identical workers appear to receive very different wages, violating the ?law of one price? of Walrasian markets. It is argued in this paper that in the absence of a Walrasian auctioneer to coordinate trade: (i) wage dispersion among identical workers is very often an equilibrium phenomenon; and (ii) such dispersion is necessary for a market economy to function. The paper analyses an environment in which firms post wages and workers may, at a small cost, observe one or more of the posted wages, i.e. search, before deciding where to apply. Both with homogeneous and heterogeneous forms, equilibrium wage dispersion is necessary for the economy to approximate efficiency. Without wage dispersion, workers do not search, and wages are depressed. As a result: (a) there is excessive entry of firms; and (b) because, in the absence of search, high-productivity firms cannot attract workers faster than low-productivity firms, their relative profitability is reduced, and technology choices are distorted.
Keywords: efficiency; search; search intensity; sorting; wage dispersion; wage posting
JEL Codes: D83; J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage dispersion (J31) | search intensity (D83) |
| search intensity (D83) | firm entry (M13) |
| search intensity (D83) | technology choices (O33) |
| wage dispersion (J31) | market efficiency (G14) |
| wage dispersion (J31) | competition among firms (L13) |
| competition among firms (L13) | wages (J31) |
| wage dispersion (J31) | social surplus (D69) |
| wage dispersion (J31) | relative profitability of high-productivity firms (D22) |
| wage dispersion (J31) | labor productivity (J24) |