Working Paper
Wage Inequality and Job Stability
Abstract: How much wage inequality in Brazil is caused by firing costs? To answer this question, I develop and estimate a general equilibrium search and matching model with heterogeneous layoff rates among firms. Using matched employer-employee data from Brazil, I estimate the model, and I find that it replicates the observed residual wage inequality in the data. I simulate a counterfactual removal of existing firing costs, and I find that residual wage inequality drops by 26% as measured by wage variance and by 4.4% as measured by the p95-p5 ratio among 25- to 55-year-old males working in the private sector with at most a high school degree. Worker welfare among this subgroup of households increases by almost 1% in response to the abolishment of firing costs.
Keywords: Layoff rates; Earnings inequality; Firm heterogeneity; Matched employer-employee data; Wage differentials; Equilibrium search model;
JEL Classification: E61; J31; J63;
https://doi.org/10.21034/iwp.5
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Opportunity and Inclusive Growth Institute Working Papers
Publication Date: 2017-12-05
Number: 5
Pages: 68 pages