The Equilibrium Approach to Labor Markets

This paper exposits the modern theory of equalizing differences,viewed as optimal assignments of workers to jobs. The basic ideas are first illustrated in a simple model with binary choices of work attributes.Multinominal choices are briefly considered after that. Empirical implications are stressed, with special emphasis on elements of selectivity and stratification by tastes and technology. Applications are sketched for certain aspects of the economics of discrimination, human capital, the value of safety and the theory of implicit contracts. Issues raised by assignment stratification according to worker traits and productivities are discussed, and the principle sorting model by comparative advantageis outlined. The implied valuation system on personal traits and its relationship to factor-analytic models, as well as selectivity issues in educational and occupational choice illustrate this aspect of the theory.