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A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology

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  • Shouyong Shi

Abstract

In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill-biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high-tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low-tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between-skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill-biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity. Copyright 2002, Wiley-Blackwell.

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  • Shouyong Shi, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(2), pages 467-491.
    • Handle: RePEc:oup:restud:v:69:y:2002:i:2:p:467-491
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00213
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