Practice question · Multiple choice
Two workers do the same job with the same skill and one earns 30% more. Standard labour theory predicts equal pay. What is the most common real explanation?
Hints
- Ask what it costs a worker to find and move to the better-paying firm.
- The competitive model assumes something about information and mobility. Which assumption fails first?
Show the answer
A. Search frictions, since matching is costly and slow
Why
The frictionless model assumes costless search and instant mobility, and neither holds, so wage dispersion survives among identical workers. Search theory is what earned Diamond, Mortensen and Pissarides the 2010 Nobel, and it is why unemployment can coexist with vacancies.
Practise Labor Economics
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