Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution
Working Paper 31318
DOI 10.3386/w31318
Issue Date
This paper builds a general equilibrium framework with firm and worker heterogeneity, monopsony power, and task-based production to quantify the long-run effects of education, biased demand shocks, and minimum wage. I take it to Brazilian data for 1998 and 2012 and find that (i) supply and demand shocks increase sorting of high-wage workers to high-wage firms, (ii) increased entry of high-wage firms boosts the effect of rising schooling attainment on mean log wages by 25%, and (iii) the minimum wage reduces formal wage inequality but also causes wage loss for mid-productivity workers and disemployment for those at the very bottom.