Brownbag Seminars: The Rat Race Revisited: Mobility and Wage Inequality

Abstract: In labour markets with high mobility, firms can free-ride on screening by their
competitors. Firms screen talent by a task difficulty, as in Akerlof (1976). In equilibrium,
highly skilled workers work at high-productivity firms. If other firms can poach
these workers, they can exploit the revealed information on skill. This increases their
willingness to pay for skilled labour, raising the outside option of talented workers.
This increases wages, as well as the difficulty of the task. High-productivity firms need
to require a high difficulty, in order to deter less talented workers. Thus, existing wage
differentiation is exacerbated by labour mobility.