Frictional Wage Dispersion In Search Models: A Quantitative Assessment

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. The authors derive this result for a specific measure of wage dispersion - the ratio between the average wage and the lowest (reservation) wage paid. They show that in a large class of search and matching models this statistic (the "Mean-min ratio") can be obtained in closed form as a function of observable variables (i.e., the interest rate, the value of leisure, and statistics of labor market turnover).