Job Rents in a Stylized Labor Market

Wage formation is often analyzed by assuming that wage
differentials reflect productivity differentials intrinsic to the
workers, like differences in skill or qualification. Observed
industry and firm effects on wages suggests, however, that wage
differentials may result from causes rather unrelated to intrinsic
productivity. This paper considers the polar case of homogeneous
labor. The wage differentials emerging here are, thus, unrelated to
individual differences. The model used is of an economy with a
segmented labor market in which the primary sector industries are
characterized by high turnover costs. This induces firms to pay
efficiency wages reflecting turnover costs. The turnover case
offers some rather surprising yet straightforward conclusions
regarding efficiency, discrimination and taxation: Workers capture
job rents; wage dispersion is too high; considerable wage
differentials may arise from infinitesimally small differences in
productivity; and a progressive wage tax will be welfare-enhancing.