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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.
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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 

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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).

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