Unemployment, Labor Market Transitions, and Residual Wage Dispersion

30 Pages Posted: 8 Oct 2008

See all articles by Bernd Fitzenberger

Bernd Fitzenberger

Humboldt University of Berlin - School of Business and Economics

Alfred Garloff

Center for European Economic Research (ZEW)

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Abstract

It is commonplace in the debate on Germany's labor market problems to argue that low wage dispersion is a major reason for the high unemployment rate. This paper analyzes the relationship between unemployment and residual wage dispersion for individuals with comparable attributes. In the conventional neoclassical point of view, wages are determined by the marginal product of the workers. Accordingly, increases in union minimum wages result in a decline of residual wage dispersion and higher unemployment. A competing view regards wage dispersion as the outcome of search frictions and the associated monopsony power of the firms. Accordingly, an increase in search frictions causes both higher unemployment and higher wage dispersion. The empirical analysis attempts to discriminate between the two hypotheses for West Germany analyzing the relationship between wage dispersion and both the level of unemployment as well as the transition rates between different labor market states. The findings are not completely consistent with either theory. However, as predicted by search theory, one robust result is that unemployment by cells is not negatively correlated with the within-cell wage dispersion.

Suggested Citation

Fitzenberger, Bernd and Garloff, Alfred, Unemployment, Labor Market Transitions, and Residual Wage Dispersion. Scottish Journal of Political Economy, Vol. 55, Issue 5, pp. 561-590, November 2008, Available at SSRN: https://ssrn.com/abstract=1279723 or http://dx.doi.org/10.1111/j.1467-9485.2008.00466.x

Bernd Fitzenberger (Contact Author)

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Alfred Garloff

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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