Lawrence Uren

Inequality, Volatility and Labour Market Efficiency

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 efficiency or equivalently reduced search frictions increase wage inequality by increasing the degree of positive assortive matching. Simultaneously, aggregate volatility of output decreases as labor market efficiency increases since reduced frictions insulate the economy from shocks that affect employment. In a calibrated model the improvement in labor market efficiency explains around 20 percent of the decline in output volatility and roughly 40 percent of the increase in wage inequality after 1985.

Skill Requirements, Search Frictions, And Wage Inequality

We analyze wage inequality, extending the Burdett and Mortensen (International Economic Review 39 (1998), 257-73) model by incorporating worker heterogeneity through skill requirements. We provide sufficient conditions for existence of an equilibrium where more productive firms offer higher wages. The unique such equilibrium is characterized in a closed form solution. Both within- and between-group inequality are explicitly calculated. We then calibrate the model to explain the joint movement of both within- and between-group inequality in the late 1980s and 1990s, an explanation that has been elusive in the literature so far.

The Allocation of Labor and Endogenous Search Decisions

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 arises because of the interaction between the investment decisions of firms and the search decisions of workers. Despite constant returns to scale in both the matching and production functions, this interaction can generate multiple equilibria. The existence of multiple equilibria is shown to depend crucially on the direction of comparative advantage.

Equilibrium Unemployment with Incomplete Markets

This paper integrates a frictional labour market into a general equilibrium model with incomplete markets. Workers are subject to employment shocks and are able to insure themselves by trading a risk free asset. Firms seek to maximise profits by hiring workers in a frictional labour market. In equilibrium, the level of unemployment, the interest rate, and output are jointly determined. Using a continuous time framework, we show the steady state equilibrium is easier to characterise than competing discrete-time models. In particular, we are able to derive a steady state distribution of wealth, consumption and utility in closed form. The model is then used to address the effect of unemployment insurance on welfare.

Search and the Labour Market

This article surveys some of the contributions of search theory to understanding labour markets. Search theory assumes that trading does not occur in perfectly competitive markets, but rather that frictions exist in the trading process. By making this assumption, search theory is able to explain several aspects of labour market behaviour that are difficult to understand from the perspective of a perfectly competitive labour market.