Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

79 Pages Posted: 25 Jul 2016 Last revised: 24 Apr 2023

See all articles by Christopher Taber

Christopher Taber

National Bureau of Economic Research (NBER); University of Wisconsin - Madison

Rune Vejlin

University of Aarhus

Multiple version iconThere are 2 versions of this paper

Date Written: July 2016

Abstract

In this paper we develop a model capturing key features of the Roy model, a search model, compensating differentials, and human capital accumulation on-the-job. We establish which features of the model can be non-parametrically identified and which can not. We estimate the model and use it to asses the relative contribution of the different factors for overall wage inequality. We find that Roy model inequality is the most important component accounting for the majority of wage variation. We also demonstrate that there is substantial interaction between the other features - most notably the importance of the job match obtained by search frictions varies from around 9% to around 29% depending on how we account for other features. Compensating differentials and search are both very important for explaining other features of the data such as the variation in utility. Search is important for turnover, but so is compensating differentials: 1/3 of all choices between two jobs would have resulted in a different outcome if the worker only cared about wages.

Suggested Citation

Taber, Christopher R. and Vejlin, Rune, Estimation of a Roy/Search/Compensating Differential Model of the Labor Market (July 2016). NBER Working Paper No. w22439, Available at SSRN: https://ssrn.com/abstract=2813887

Christopher R. Taber (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Rune Vejlin

University of Aarhus ( email )

Building 350
DK-8000 Aarhus C
Denmark

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