Unemployment, Labor Market Transitions, and Residual Wage Dispersion

37 Pages Posted: 28 Jan 2005

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)

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

It is commonplace in the debate on Germany's labor market problems to argue that high unemployment and low wage dispersion are related. This paper analyses 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.

Keywords: Search friction, labor demand, labor market transitions, wages

JEL Classification: E24, J21, J31, J64

Suggested Citation

Fitzenberger, Bernd and Garloff, Alfred, Unemployment, Labor Market Transitions, and Residual Wage Dispersion (2005). ZEW Discussion Paper No. 05-04, Available at SSRN: https://ssrn.com/abstract=655761 or http://dx.doi.org/10.2139/ssrn.655761

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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