Working Paper: CEPR ID: DP5229
Authors: Pieter A. Gautier; Coen N. Teulings
Abstract: This paper shows that we can normalize job and worker characteristics such that without frictions there exists a linear relationship between wages on the one hand and worker and job type indices on the other. However, for five European countries and the US we find strong evidence for a systematic concave relation. An assignment model with search frictions provides a parsimonious explanation for our findings. This model yields two restrictions on the coefficients that fit the data well. Allowing for unobserved heterogeneity and measurement error we find that reservation wages are 25% lower than they would be in a frictionless world. Our results relate to the literature on industry wage differentials and on structural identification in hedonic models.
Keywords: assignment; search; wage differentials
JEL Codes: J210; J230; J300
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wages depend linearly on worker and job type indices (J31) | Wages depend on worker and job type indices in a frictionless economy (J39) |
| Search frictions (J69) | Wages exhibit a concave relationship with worker and job indices (J31) |
| Search frictions (J69) | Reservation wages are approximately 25% lower than in a frictionless setting (J31) |