Abstract:

This dissertation examines the effects of heterogeneity in labor markets with search frictions.

The first chapter focuses upon an allocation problem. How are resources allocated across different sectors of an economy in an environment with search frictions and in which labor is allowed to choose which sector to search for employment? This chapter highlights the possibility of inefficient allocations due to an interaction between the search decisions of workers and the investment decisions of firms. The main implication is that even in an economy with constant returns to scale in production and matching technology within each sector, multiple equilibrium may exist. The existence of multiple equilibria is shown to depend crucially upon the direction of comparative advantage.

The second chapter addresses two relatively recent developments in the U.S. macroeconomy. Since the early 1980s, there has been an increase in wage inequality in the cross-section while at roughly the same time, there has been a decrease in the volatility of aggregate output. This chapter identifies how reduced frictions, caused by greater competition for example, may help explain both of these factors. Reduced frictions are able to generate increased wage inequality by increasing the degree of positive assertive matching. Simultaneously, reduced frictions also dampen the impact that shocks to the job destruction rate have upon employment. This reduced impact of shocks to employment leads to a decline in volatility of output.

The final chapter is the product of joint work with Gabor Virag. It deals with the increase in wage inequality by extending a standard model of wage-setting by firms to incorporate worker production heterogeneity in the form of skill requirements. In this environment, it becomes possible to examine the impact of changes in technology upon wage inequality. Numerical examples demonstrate that skill-biased technological change may increase both between- and within-group inequality as observed during the 1980s. On the other hand, increases in productivity of less productive firms may increase within-group inequality and decrease between-group inequality consistent with movements in wage inequality during the 1970s.