DP3471 Do Good Workers Hurt Bad Workers - or is it the Other Way Around?

Author(s): Espen R Moen

Publication Date: July 2002

Keyword(s): directed search , heterogeneous workers , wage differentials , labour market segmentation , unemployment

JEL(s): D30 , D50 , J31 , J64

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP3471.asp

In this article, I study the effect of worker heterogeneities on wages and unemployment within the context of a directed search model. A worker's productivity in a given firm depends both on their type and on a worker-firm specific component. Firms advertise unconditional wage offers, and hire the most productive workers that show up. The resulting equilibrium is inefficient, as the wage premium paid to high-type workers is too high, and the number of high-type jobs too low compared to the output-maximizing solution. This reduces the welfare of high-type workers. My findings contrast with the findings in the literature on labour market segmentation, where the argument is that the existence of high-type workers forces down wages to low-type workers and thus reduces the welfare of this group.