SSE/EFI Working Paper Series in Economics and Finance
Skill or Luck? Search Frictions and Wage Differentials
() and Åsa Rosen
Abstract: The paper seeks to explain a collection of empirical
regularities concerning inter- and intra-industrial wage differentials. For
example, the model is consistent with the following well established set of
observations: (i) After correcting for other variables, the wage of
displaced workers is strongly related both to the characteristics of the
original firm and the characteristics of the new firm, (ii) wage
differentials are correlated across occupations, and (iii) the pattern of
wage differentials are similar across countries with different market
institutions. Our framework is a search- matching model with heterogeneous
worker skills and endogenous wage policies (wage posting or bargaining).
The model has equilibria in which firms post different wages. Higher wages
attract more able workers on average. For a given posted wage, there may be
an interval of worker productivities such that both the worker and the firm
are satisfied with the match. Hence, a worker's wage reflects luck as well
as skill. Even though the model predicts a correlation between industry
characteristics and wage premia, the relationship can not be exploited by
policy makers (the Lucas critique applies).
Keywords: Wage differentials; recruiting; adverse selection; search models; (follow links to similar papers)
JEL-Codes: J31; J41; (follow links to similar papers)
28 pages, January 1994
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