The next Economics Seminar of Paris-Saclay will take place on Thursday, October 20 from 12h15 to 13h15. Alessandra Pizzo (Paris 8) will present Labor Markets, Wage Inequality and Hiring Selectivity (joint with B. Villena Rolda)
Labor markets reward the most talented workers through high wages and beneficial transitions, and the opposite occurs for the most unproductive ones. These casual observations relating worker flows and ability or match quality find empirical support: the unemployment rate and wage inequality have highly significant, positive and concave relation over time and across states in the US. Job finding rates and Job-to-job transitions also share this common pattern. We rationalize these facts through employer hiring selectivity in a non-sequential search model with on-the-job search. Most qualified applicants, either unemployed or employed, have higher chances to be hired, especially when unemployment is high. Employer selectivity also generates a general equilibrium composition effect affecting inequality. We estimate our model using CPS worker flows and wages data via Generalized Method of Moments. We also analyze the social planner problem, and we show that a regressive taxation should be implemented to increase efficiency in this setting, since highly productive matches spur vacancies and create a positive externality to the whole market.