Skill requirements, search frictions, and wage inequality

Abstract

We analyze wage inequality, extending the Burdett and Mortensen (International Economic Review39 (1998), 257-73) model by incorporating worker heterogeneity through skill requirements. We provide sufficient conditions for existence of an equilibrium where more productive firms offer higher wages. The unique such equilibrium is characterized in a closed form solution. Both within- and between-group inequality are explicitly calculated. We then calibrate the model to explain the joint movement of both within- and between-group inequality in the late 1980s and 1990s, an explanation that has been elusive in the literature so far. © (2011) by the Economics Department of the University of Pennsylv..