SEMINAR 28 January 2013: Annaïg Morin, European University Institute and Bocconi University

Wage Dispersion over the Business Cycle

Abstract

In this paper, I establish a positive correlation between wage dispersion and GDP at business cycle frequencies. Moreover, I provide a rationale for the procyclical properties of wage dispersion by studying a dynamic search model with wage-posting in which workers can get multiple job offers each period. I analyze the channels through which the business cycle influences the shape of the wage distribution. The presence of search frictions gives firms monopsony power, i.e. power to impose wage levels on workers, and generates differences in wage policy across firms. The speed at which workers can move to other jobs affects the degree of firmscompetition over workers and impacts the extent to which firms exploit their monopsony power. Therefore, in booms, the value of workers’ outside option goes up as the quantity and the quality of job offers increase, and this, in turn, erodes firms’ monopsony power in wage setting. In consequence, firms post more high-paying vacancies. Such strategic reaction of firms thickens the upper tail of the wage distribution, shifts the mass of the wages to the right and, as a result, generates a larger wage dispersion.

Keywords: Monopsony; Wage differentials; Cycles

JEL classification: J42; J31; E32