“Frictional Assignment, Part II: Infinite Horizon and Inequality” by Shouyong SHI
In this paper, I extend a companion paper to an infinite horizon and study the assignment in a frictional labor market where machines of different qualities and workers of different skills need to be matched through a time-consuming process to produce output. I characterize the efficient allocation and show that there is an equilibrium to decentralize the efficient allocation along the entire time path. As in the static model, the efficient assignment in the infinite horizon economy may not necessarily be positively assortative. With calibration exercises, the model reveals that (i) wage inequality is significantly larger than the skill difference, (ii) the true inequality is even larger than wage inequality, and (iii) a skill-biased technological progress reduces inequality among workers who can use the new technology while increasing inequality between workers who can and workers who cannot use the new technology.