Exploring the Causes of Frictional Wage Dispersion

Standard search models are unreliable for structural inference of the underlying sources ofwage inequality because they are inconsistent with observed residual wage dispersion. Weaddress this issue by modeling skill development and duration dependence in unemploymentbenefits in a random on the job search model featuring two-sided heterogeneity. Generalhuman capital and search on the job are the main drivers behind our model’s empiricalsuccess in replicating wage dispersion (residual and overall). A realistic quantitative appraisalof search efficiencies needs to account for one third of job to job transitions resulting in wagelosses. Controlling for them has important implications for the inferred sources of wageinequality. We find that the search friction accounts for around 18 percent of observed wageinequality....