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If You're so Smart, Why Aren't You Rich? Wage Inequality with Heterogenous Workers?

Booth, Alison L and Zoega, Gylfi (2002) If You're so Smart, Why Aren't You Rich? Wage Inequality with Heterogenous Workers? Working Paper. C.E.P.R. Discussion Papers.

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Abstract

This Paper provides microfoundations for wage compression by modelling wage-setting in a world of heterogeneous workers and firms. Workers are differentiated by observable innate ability. A high-ability worker confers on a firm an externality, since their ability raises the average level of talent within that firm and increases the range of tasks that can be performed. This gives some firms monopsony power in the market for labour trained to do more advanced tasks. Firms will assign their better workers to the more advanced tasks performed within their ranks, and wages are compressed within firms, so that low-ability workers are paid more, relative to their talent, than high-ability workers. The model also offers an explanation for why wage inequality has recently increased in some countries: exogenous changes that increase labour market competition can disproportionately benefit higher ability workers and widen the wages distribution.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: heterogenous workers; hierarchical assignment models; monopsony; wage compression
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 18 Jul 2012 11:10
Last Modified: 18 Jul 2012 11:10
URI: http://repository.essex.ac.uk/id/eprint/3165

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