Working Paper: NBER ID: w14122
Authors: Elhanan Helpman; Oleg Itskhoki; Stephen Redding
Abstract: In this paper we develop a multi-sector general equilibrium model of firm heterogeneity, worker heterogeneity and labor market frictions. We characterize the distributions of employment, unemployment, wages and income within and between sectors as a function of structural parameters. We find that greater firm heterogeneity increases unemployment, wage inequality and income inequality, whereas greater worker heterogeneity has ambiguous effects. We also find that labor market frictions have non-monotonic effects on aggregate unemployment and inequality through within- and between-sector components. Finally, high-ability workers have the lowest unemployment rates but the greatest wage inequality, and income inequality is lowest for intermediate ability. Although these results are interesting in their own right, the main contribution of the paper is in providing a framework for analyzing these types of issues.
Keywords: wages; unemployment; inequality; heterogeneous firms; heterogeneous workers
JEL Codes: D21; D24; D31; D43; J31; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater firm heterogeneity (L25) | increased unemployment (J65) |
| greater firm heterogeneity (L25) | increased wage inequality (J31) |
| greater firm heterogeneity (L25) | increased income inequality (D31) |
| greater worker heterogeneity (J29) | ambiguous effects on wage inequality (J70) |
| greater worker heterogeneity (J29) | ambiguous effects on unemployment (J65) |
| greater worker heterogeneity (J29) | influences overall income inequality (D31) |
| high-ability workers (J24) | lower unemployment rates (J68) |
| high-ability workers (J24) | greater wage inequality (J31) |
| workers with intermediate ability (J24) | lowest income inequality (D31) |
| labor market frictions (J29) | nonmonotonic effects on aggregate unemployment (E24) |
| labor market frictions (J29) | nonmonotonic effects on inequality (J70) |