Equilibrium Wage Dispersion with Worker and Employer Heterogeneity
We construct and estimate an equilibrium search model with onthejobsearch. Firms make takeitorleaveit wage offers to workers conditional on their characteristics and they can respond to the outside job offers received by their employees. Unobserved worker productive heterogeneity is introduced in the form of crossworker differences in a competence parameter. On the other side of the market, firms also are heterogeneous with respect to their marginal productivity of labor. The model delivers a theory of steadystate wage dispersion driven by heterogenous worker abilities and firm productivities, as well as by matching frictions. The structural model is estimated using matched employer and employee French panel data. The exogenous distributions of worker and firm heterogeneity components are nonparametrically estimated. We use this structural estimation to provide a decomposition of crossemployee wage variance. We find that the share of the crosssectional wage variance that is explained by person effects varies across skill groups. Specifically, this share lies close to 40% for highskilled white collars, and quickly decreases to 0% as the observed skill level decreases. The contribution of market imperfections to wage dispersion is typically around 50%.