Sufficient Statistics for Frictional Wage Dispersion and Growth

74 Pages Posted: 3 Dec 2020

See all articles by Rune Vejlin

Rune Vejlin

Aarhus University

Gregory F. Veramendi

University of Munich (LMU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

This paper develops a sufficient statistics approach for estimating the role of search frictions in wage dispersion and lifecycle wage growth. We show how the wage dynamics of displaced workers are directly informative of both for a large class of search models. Specifically, the correlation between pre- and post-displacement wages is informative of frictional wage dispersion. Furthermore, the fraction of displaced workers who suffer a wage loss is informative of frictional wage growth and job-to-job mobility, independent of the job-offer distribution and other labor-market parameters. Applying our methodology to US data, we find that search frictions account for less than 20 percent of wage dispersion. In addition, we estimate that between 40 to 80 percent of workers experience no frictional wage growth during an employment spell. Our approach allows us to estimate how frictions change over time. We find that frictional wage dispersion has declined substantially since 1980 and that frictional wage growth, while low, is more important towards the end of expansionary periods. We finish by estimating two versions of a random search model to show how at least two different mechanisms—involuntary job transitions or compensating differentials—can reconcile our results with the job-to-job mobility seen in the data. Regardless of the mechanism, the estimated models show that frictional wage growth accounts for about 15 percent of lifecycle wage growth.

JEL Classification: E240, J310, J640

Suggested Citation

Vejlin, Rune and Veramendi, Gregory F., Sufficient Statistics for Frictional Wage Dispersion and Growth (2020). CESifo Working Paper No. 8722, Available at SSRN: https://ssrn.com/abstract=3740334

Rune Vejlin (Contact Author)

Aarhus University

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Gregory F. Veramendi

University of Munich (LMU) ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

HOME PAGE: http://https://gregveramendi.github.io

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