ABSTRACT

Wages in different sectors (different locations, industries, or firms) have been observed to differ markedly from one another. This may be because the quality of labor in the different sectors differs; but it may also be the case that a worker of a given quality who happens to obtain a job in one sector (firm) will obtain a higher wage than a similar individual who obtains a job in another sector. In conventional competitive equilibrium theory, such a situation could not persist; the fact that it does requires explanation and its consequences - in particular, the unemployment to which it gives rise - need to be taken into account in any analysis of policy. That is the purpose of this chapter.