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INFLATION AND REAL WAGE DISPERSION: A MODEL OF FRICTIONAL MARKETS

Macroeconomic dynamics, 2018-06, Vol.22 (4), p.1001-1034 [Peer Reviewed Journal]

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Title:
INFLATION AND REAL WAGE DISPERSION: A MODEL OF FRICTIONAL MARKETS
Author: Zhang, Min ; Huangfu, Stella
Subjects: Economic models ; Inflation ; Job hunting ; Retirement homes ; Wages & salaries
Is Part Of: Macroeconomic dynamics, 2018-06, Vol.22 (4), p.1001-1034
Description: Current Population Survey (CPS) data over the period from 1994 to 2008 show that inflation has a positive effect on the residual wage dispersion. To explain this phenomenon, we introduce uncoordinated job searches into a general equilibrium monetary search framework. Our model shows that the uncoordinated job searches by unemployed workers give rise to an equilibrium, where a firm is matched with zero, one, or multiple job applicants. The ex post difference in matching probabilities generates a two-point wage dispersion among identical workers, when the Mortensen rule is implemented in the wage-determination process. In our model, inflation positively influences the wage dispersion directly through its impact on firm's real profit and indirectly through the effect of inflation that spills over from the goods market to the labor market. With reasonable parameter values, the calibrated model can account for most of the observed responses of residual wage dispersion to inflation.
Publisher: New York, USA: Cambridge University Press
Language: English
Identifier: ISSN: 1365-1005
EISSN: 1469-8056
DOI: 10.1017/S1365100516000559
Source: ProQuest Central

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