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Wage Inequality: A Structural Approach (ECO-AD-WAGEINEQ)

ECO-AD-WAGEINEQ

Description

Objectives
This course provides an in-depth analysis of the impact of search frictions and human capital in shaping the wage inequality. We will explore the implications for the wage distribution, in the cross-section and over the business cycle, as well as for the cost of job loss and the sources of earnings risk. The course will include both theoretical and empirical literature, and it is intended for students interested in research in macro labour economics. A key feature of the course is to showcase the thinking process behind the models and quantitative approaches to identification – what worked and what did not – as well as the history behind the development of this literature. At the end of the course students should have a working knowledge of the models used and a good sense of the open questions in those subject areas for which these models are most appropriate.

Requirements
Students should be familiar with the basic concepts of dynamic programming and stochastic process techniques.

Contact Hours
5 sessions, each of 120 minutes.

Assessment
Class discussion of problem sets and one in-class final test.

Outline
1. Wage Dispersion: measurement and empirical regularities.
2. The Workhorse Models: Diamond (1971, JET), Albrecht and Axel (1984, JPE) and Burdett and Mortensen (1998, IER).
3. Human Capital and the Job Ladder: Burdett, Carrillo-Tudela and Coles (2011, IER) and (2016, RED).
4. Optimal Contracts and the Wage Distribution: Stevens (2004, REStud), Burdett and Coles (2003, ECMA), Carrillo-Tudela (2009, RED)
5. The Cost of Job Loss: Burdett, Carrillo-Tudela and Coles (2020, REStud).
6. Wage Dispersion, Firm Dynamics and the Business Cycle: Carrillo-Tudela, Clymo and Coles (2025, WP)
7. Earnings Dynamics and Occupation Mobility: Carrillo-Tudela and Visschers (2023, ECMA), Carrillo-Tudela, Visschers and Wiczer (2026, WP)
8. Eliciting Expected Wage Distributions: Carrillo-Tudela, Costas-Dias, Hussein and Postel-Vinay (2026, WP)

General References
Pissarides C. (2000), Equilibrium Unemployment Theory, 2nd edition, MIT Press.
Mortensen D. (2003), Wage Dispersion: Why are Similar People Paid Differently, 1st edition Cambridge: MIT Press.
Mortensen D. and C. Pissarides (1999), “New Developments in Models of Search in the Labor Market”, Ch. 39, in Ashenfelter and Card, Handbook of Labor Economics, volume 3B, Elsevier.
Rogerson R., R. Shimer, and R. Wright, (2005), “Search-Theoretic Models of the Labor Market: A Survey”, Journal of Economic Literature, December.

References for Dynamic Programming and Stochastic Process
Ljungqvist, L. and T. Sargent, (2004), Recursive Macroeconomics Theory, Cambridge, MIT press.
Adda, G. and R. Copper, (2005), Dynamic Economics, Cambridge, MIT press.
Ross, S. (2008), Introduction to Probability Models, Academic Press.

ENROL FOR THIS COURSE