Journal Article

Social Preferences, Skill Segregation, and Wage Dynamics

Antonio Cabrales, Antoni Calvó-Armengol and Nicola Pavoni

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 1, pages 65-98
Published in print January 2008 | ISSN: 0034-6527
Published online January 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00460.x
Social Preferences, Skill Segregation, and Wage Dynamics

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  • Demand and Supply of Labour
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We study the earning structure and the equilibrium assignment of workers to firms in a model in which workers have social preferences, and skills are perfectly substitutable in production. Firms offer long-term contracts, and we allow for frictions in the labour market in the form of mobility costs. The model delivers specific predictions about the nature of worker flows, about the characteristics of workplace skill segregation, and about wage dispersion both within and across firms. We show that long-term contracts in the presence of social preferences associate within-firm wage dispersion with novel “internal labour market” features such as gradual promotions, productivity-unrelated wage increases, and downward wage flexibility. These three dynamic features lead to productivity-unrelated wage volatility within firms.

Keywords: J24; J31; J41

Journal Article.  20218 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Particular Labour Markets ; Wages, Compensation, and Labour Costs

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