A directed search model of inequality with heterogeneous skills and skill-biased technology

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Abstract

In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill-biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high-tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low-tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between-skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill-biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity.

Original languageEnglish (US)
Pages (from-to)467-491
Number of pages25
JournalReview of Economic Studies
Volume69
Issue number2
DOIs
StatePublished - Jan 1 2002

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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