In the 1980s there was an increase in cross-sectional wage inequality while simultaneously there was a decrease in the time series volatility of aggregate output. This paper argues that increased efficiency of the labor market may help explain both features of the data. Increases in labor market...

This paper examines the allocation of heterogeneous workers across sectors of an economy in which workers are able to direct their search towards particular firms. We find that search frictions, in addition to causing unemployment, may result in an inefficient allocation of labor. This result...