Matching the magnitude of frictional wage dispersion has been dicult
for most frictional search models of the labor market; only 1/30{1/4 of the
frictional wage dispersion observed in the data can be accounted for using
realistic calibrations. In this paper, I develop a general equilibrium model
with ex ante homogeneous workers but heterogeneous rm productivities that
accounts much better for the magnitude of frictional wage dispersion.
The key ingredient that makes this model dierent from wage posting models
is the bargaining and the wage determination structure. When a rm meets
an employed worker, the new rm and the incumbent rm engage in Bertrand
competition in the worker’s share of the match surplus; consequently the current
wage of the worker depends not only on the rm’s productivity, but also
on the history of previous oers. I demonstrate that the latter generates about
3/4 of the frictional wage dispersion, and that standard wage posting models
cannot achieve similar magnitudes of frictional wage dispersion with the calibration
used in the paper.
In contrast to the structural estimation literature, the parametrization of
the model is very parsimonious. The model is calibrated to match the worker
ows, the standard deviation of log productivity and the replacement ratio,