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Inequality, Volatility and Labour Market Efficiency

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  • Uren Lawrence

    (University of Melbourne)

Abstract

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.

Suggested Citation

  • Uren Lawrence, 2008. "Inequality, Volatility and Labour Market Efficiency," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-30, May.
    • Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:17
    DOI: 10.2202/1935-1690.1670
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    References listed on IDEAS

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    Cited by:

    1. Jordi Galí & Thijs van Rens, 2021. "The Vanishing Procyclicality of Labour Productivity [Why have business cycle fluctuations become less volatile?]," The Economic Journal, Royal Economic Society, vol. 131(633), pages 302-326.
    2. Huang, Ho-Chuan (River) & Fang, WenShwo & Miller, Stephen M. & Yeh, Chih-Chuan, 2015. "The effect of growth volatility on income inequality," Economic Modelling, Elsevier, vol. 45(C), pages 212-222.
    3. Ozan EksiBy, 2017. "Lower volatility, higher inequality: are they related?," Oxford Economic Papers, Oxford University Press, vol. 69(4), pages 847-869.

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