Jobb ladder and wage dispersion Flashcards
How does the Job ladder models presented contrast to the McCall model?
In contrast to the McCall model, the models presented in this lecture are general eq models that explicitly model firm behavior. These are job ladder models meaning that employees can search while employed, resulting in them moving to better positions. These models solve the Diamond paradox.
What is the Abowd-Kramarz-Margolis (AKM )regression. How much of wage dispersion can this type of regression explain?
They use the Mincer regression but includes firm fixed and individual fixed effects. This by matching employees and employers and follow them over time.
- Individual fixed effects = identify variation in worker earnings within firms.
- Firm fixed effects = identify variation in worker earnings from workers switching jobs.
With these fixed effects we can get $R^2 \approx 0.85$
How do the Abowd-Kramarz-Margolis (AKM) regression relate to the Burdett-Mortensen model?
These variation in the fixed effects shows that there are actually variations both between individuals and between firms. Some individuals are just always better payed and some firms do always pay better. Some individuals are more productive, and some firms are more profitable. This is what is modeled by the BM-model
What is qualitatively the workers problem in the BM model?
The problem for the worker is to reject or accept an offer (same as in McCall). But now, workers also gets wage offers, which they will accept if they are higher than their reservation wage.
What is a fact regarding firm size and wages in the BR model?
Firm size l(w) increases with the wage. Bigger firms pay higher wages. This is because they lose fewer workers because it is hard for workers to find such a nice-paid job. They also attract more workers when the wage is high. High paying firms are large firms!
Workers climb the work ladder so there is a higher inflow and lower outflow. This is true in data.
What is the firm problem in the BR model?
max (y-w)l(w)
where l(w) is the firm size distribution.
What are the main implications i the BR model?
- We get a non-degenerate continuous wage distribution (wage setting with wage inequality). This is due to the search frictions.
- Larger firms have larger wages, larger wages give lower profits.
- Tenure is positively correlated with wages
How well does the BR model fit the data?
Using the Mm_BM we get values of 1.22, which are higher than the Mm_McCall = 1.05 but still far from what we see in the data = 1.8.
However, this model explains well the results from the AKM-regression.
What are the limitations of the BR model?
- No role for search functions
- In reality, there is downward wage-mobility!
Is it true that the basic Burdett-Mortensen model predicts that tenure is negatively correlated with wages in the cross-sectional distribution?
No since the prob ob getting a better offer is low when you have a high salary.
It predicts a positive correlation between tenure and wages. Workers with already high wages will not often get better offers, so they stay for longer at the same firm.
Consider the basic Burdett-Mortensen model. Why is the equilibrium wage distribution continuous?
Workers can search on the job (key thing )and firms post different wages. With on the job search, we get a trade off from posting higher or lower wages, lower wages gives ur more rent per worker, while higher wagers give the firm more workers. Because of this trade off, we get the result that we can get the same amount of profit of being a small or large firm. This leads firms posting different wages and thus a continuous wage distribution
