“Residual” Wage Disparity in Directed Search Equilibrium

We examine how much of the observed wage dispersion among similar workers can be explained as a consequence of a lack of coordination among employers. To do this, we construct a directed search model with homogenous workers but where firms can create either good or bad jobs, aimed at either employed or unemployed workers. Workers in our model can also sell their labor to the highest bidder. The stationary equilibrium has both technology dispersion – different wages due to different job qualities, and contract dispersion – different wages due to different market experiences for workers. The equilibrium is also constrained-efficient – in stark contrast to undirected search models with technology dispersion. We then calibrate the model to the US economy and show that the implied dispersion measures are quite close to those in the data. JEL codes: E24, E25, J31, J24, J64 This paper was presented at the 2001 Society for Economic Dynamics meetings in Stockholm, the 2001 Australasian meetings of Econometric Society in Auckland, the 2001 Canadian Economics Association meeting in Montreal, the 2001 NBER summer institute, and at the University of Sydney. Comments by Debasis Bandyopadhyay, Ken Burdett, Marcel Jansen, Klaus Kultti, Sholeh Maani, Tim Maloney, Dale Mortensen, Christopher Pissarides, Alan Rogers, and Randall Wright are gratefully acknowledged. * Benoît Julien, University of Miami, USA, Ian King, University of Auckland, NZ, and John Kennes, University of Auckland.