Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-26T05:47:55.015Z Has data issue: false hasContentIssue false
  • English
  • Français

INFLATION AND REAL WAGE DISPERSION: A MODEL OF FRICTIONAL MARKETS

Published online by Cambridge University Press:  05 August 2016

Min Zhang  and
Stella Huangfu
Min Zhang*
Affiliation:
Shanghai University of Finance and Economics and Key Laboratory of Mathematical Economics (SUFE), Ministry of Education
Stella Huangfu
Affiliation:
University of Sydney
*
Address correspondence to: Min Zhang, School of Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China; e-mail: zhang.min@mail.shufe.edu.cn.
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

InflationResidual Wage DispersionUncoordinated Job SearchSpillover Effect
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 4 , June 2018 , pp. 1001 - 1034
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are thankful for the feedback received at various places where this paper was presented. We are also grateful to the editor and referees for insightful comments. Min Zhang is thankful for financial support from the National Natural Science Foundation of China (Grant No. 71203132).

References

REFERENCES

Acemoglu, D. (2002) Technical change, inequality, and the labor market. Journal of Economic Literature 40 (1), 7–72.CrossRefGoogle Scholar
Albrecht, J. and Vroman, S. (2001) Equilibrium search with time-varying unemployment benefits. Economic Journal 115, 631–648.CrossRefGoogle Scholar
Autor, D.H., Katz, L.F., and Kearney, M.S. (2008) Trends in U.S. wage inequality: Revising and revisionists. Review of Economics and Statistics 90, 300–323.Google Scholar
Berentsen, A., Menzio, G., and Wright, R. (2011) Inflation and unemployment in the long run. American Economic Review 101, 371–398.CrossRefGoogle Scholar
Bulir, A. (2001) Income Inequality: Does Inflation Matter? IMF Staff Papers, Vol. 48, No. 1.Google Scholar
Burdett, K. and Mortensen, D. (1998) Wage differentials, employer size, and unemployment. International Economic Review 39, 257–273.Google Scholar
Burdett, K., Shi, S., and Wright, R. (2001) Pricing and matching with frictions. Journal of Political Economy 109, 1060–1085.Google Scholar
Cao, M. and Shi, S. (2000) Coordination, matching, and wages. Canadian Journal of Economics 33, 1009–1033.Google Scholar
Card, D. and DiNardo, J. (2002) Skill-biased technological change and rising wage inequality: Some problems and puzzles. Journal of Labor Economics 20 (4), 733–783.CrossRefGoogle Scholar
Cysne, R., Wilfredo, M., and Monteiro, P. (2005) Inflation and income inequality: A shopping-time approach. Journal of Development Economics 78, 516–528.Google Scholar
Diamond, P. (1993) Search, sticky prices, and inflation. Review of Economic Studies 60, 53–68.Google Scholar
Erikson, C. and Ichino, A. (1995) Wage differentials in Italy: Market forces and institutions. In Freeman, R. B. and Katz, L. (eds.) Differences and Changes in Wage Structures, pp. 265–305. Chicago: University of Chicago Press.Google Scholar
Faig, M. and Jerez, B. (2005) A theory of commerce. Journal of Economic Theory 122, 60–99.Google Scholar
Faig, M., Zhang, M., and Zhang, S. (2016) Effects of extended unemployment insurance benefits on labor dynamics. Macroeconomic Dynamics 20 (5), 1174–1195.Google Scholar
Garcia-Penalosa, C. and Turnovsky, S. (2015) Income inequality, mobility, and the accumulation of capital. Macroeconomic Dynamics 19, 1332–1357.Google Scholar
Hammermesh, D. (1986) Inflation and labor market adjustment. Economica 53, 63–73.CrossRefGoogle Scholar
Hornstein, A., Krusell, P., and Violante, G. (2007) Frictional Wage Dispersion in Search Models: A Quantitative Assessment. National Bureau of Economic Research Working Paper 13674.Google Scholar
Horstein, A., Krusell, P., and Violante, G. (2011) Frictional wage inequality in search models: A quantitative assessment. American Economic Review 101, 2873–2898.Google Scholar
Julien, B., Kennes, J., and King, I. (2006) Residual wage disparity and coordination unemployment. International Economic Review 47 (3), 961–989.Google Scholar
Julien, B., Kennes, J., and King, I. (2011) Implementing the Mortensen rule in a frictional labor market. Journal of Macroeconomics 33, 80–91.Google Scholar
Katz, L. and Autor, D. (1999) Changes in the wage structure and earnings inequality. In Ashenfelter, O. and Card, D. (eds.), Handbook of Labor Economics, Vol. 3, Chap. 26, pp. 1464–1555. Amsterdam: Elsevier Science B.V.Google Scholar
Kumar, A. (2008) Inflation and the dispersion of real wages. International Economic Review 49, 377–399.Google Scholar
Kunieda, T., Okada, K. and Shibata, A. (2014) Finance and inequality: How does globalization change their relationship? Macroeconomic Dynamics 18, 1091–1128.Google Scholar
Lagos, R. and Wright, R. (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463–484.Google Scholar
Lemieux, T. (2006) Increasing residual wage inequality: Composition effects, noisy data, or rising demand for skill? American Economic Review 96, 461–498.Google Scholar
McAfee, R. and McMillan, J. (1987) Auctions and bidding. Journal of Economic Literature 25, 699–738.Google Scholar
Montgomery, J. (1991) Social networks an labor market outcomes: Toward an economic analysis. American Economic Review 81, 1408–1418.Google Scholar
Mortensen, D. (1982) Efficiency of matching, racing and related games. American Economic Review 72, 968–979.Google Scholar
Mortensen, D. and Pissarides, C. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397–416.Google Scholar
Munshi, K. (2003) Networks in the modern economy: Mexican migrants in the U.S. labor market. Quarterly Journal of Economics 118, 549–599.CrossRefGoogle Scholar
Ochs, J. (1990) The coordination problem in decentralized markets: An experiment. Quarterly Journal of Economics 105, 545–559.CrossRefGoogle Scholar
Pissarides, C. (1985) Short-run equilibrium dynamics of unemployment, vacancies and real wage. American Economic Review 75, 676–690.Google Scholar
Postel-Vinary, F. and Robin, J.M. (2002) The distribution of earnings in an equilibrium search model with state-dependent offers and counter offers. International Economic Review 43, 989–1016.Google Scholar
Rogerson, R., Shimer, R. and Wright, R. (2005) Search theoretic models of the labor market: A survey. Journal of Economic Literature 43, 959–988.Google Scholar
Sheshinski, E. and Weiss, Y. (1977) Inflation and the costs of price adjustment. Review of Economic Studies 44, 287–303.Google Scholar
Shi, S. (1997) A divisible search model of fiat money. Econometrica 65, 75–102.Google Scholar
Shi, S. (2002) Product market and the size-wage differential. International Economic Review 43, 21–54.Google Scholar
Shimer, R. (2005) The cyclical behavior of unemployment and vacancies: Evidence and theory. American Economic Review 95, 25–49.Google Scholar
Topa, G. (2001) Social interactions, local spillovers and unemployment. Review of Economic Studies 68, 261–295.Google Scholar
Wright, R. (2010) A uniqueness proof for monetary steady state. Journal of Economic Theory 145, 382–391.Google Scholar
Zhang, M. and Faig, M. (2012) Labor market cycles, unemployment insurance eligibility, and moral hazard. Review of Economic Dynamics 15, 41–56.Google Scholar