Intertemporal Labor Supply with Search Frictions *

Abstract

Starting in the 70's, wage inequality and the number of hours worked by employed US prime age male workers have both increased. We argue that these two facts are related. We use a labor market model with on the job search where by working longer hours individuals acquire greater skills. Since job candidates are ranked by productivity, greater skills not only increase worker's productivity in the current job but also help the worker to obtain better jobs. When job offers become more dispersed, wage inequality increases and workers work longer hours to obtain better jobs. As a result average hours per worker in the economy increase. This mechanism accounts for around two-thirds of the increase in hours observed in data. Part of the increase is inefficient since workers obtain better jobs at the expense of other workers competing for the same jobs. * We gratefully acknowledge Fundación Ramón Areces for financial support. We are very grateful to Kjetil Storesletten (the Editor) and two anonymous referees for insightful suggestions that led to a substantial improvement of the paper. We also acknowledge comments by as well as by several seminars participants. We thank Laura Hospido and Hernan Ruffo for help with the empirical work and Guillaume Vandenbroucke for making his data available to us.

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