The Distribution of Wage Rates

Abstract

The previous chapter develops one ingredient in the final distribution of earnings: the distribution of employment. This chapter develops the other ingredient, the distribution of wage offers facing the individual and the resulting distribution of accepted wage rates. Several important questions are introduced into the study of the distribution of earnings at this point. In very simple theories, the distribution of wage rates is related directly to the distribution of some individual characteristic, such as education, ability or experience. In more complex models, it arises from the assignment of workers to jobs in a deterministic model with full employment, in which differences in wage rates are related to trade-offs between product outputs or preferences in equilibrium. With job search, however, there are several intermediate steps. Even for a group facing identical labor market conditions, the distribution of accepted wage rates will resemble neither the distribution of wage offers nor the distribution of reservation wages for the group but will depend upon an interaction between the two.