“Targeted Search, Endogenous Market Segmentation, and Wage Inequality” by Huanxing Yang
Ohio State University
Is it possible that the Internet contributed to the rising wage inequality in the last two decades? To answer this question, we develop a labor search/matching model with heterogeneous workers and heterogeneous firms (finite types). One novel feature of our model is that search is targeted: each type of firms constitutes a distinctive submarket, and workers are able to choose beforehand which type of jobs to search (which submarket to participate), but search is random within each submarket. In each submarket, wages are determined by Nash bargaining. We show that, given the parameter values, there is always a unique equilibrium in which workers are endogenously segmented into different submarkets. The equilibrium matching pattern is weakly assortative, with higher ability workers matching with more productive jobs. Moreover, the segmentation pattern affects the wage structure or wage distribution in the market. We then explore how the equilibrium segmentation pattern and wage inequality change as some exogenous shocks occur, which includes a skill-biased technology progress and a decrease in the number of jobs in some low-productivity submarket. In particular, we show that an Internet-induced increase in search efficiency would make the matching pattern overall more assortatitve, increase wage inequality within each submarket (workers with similar jobs), and also increase the overall wage inequality across submarkets.