A directed search model of inequality with heterogeneous skills and skill-biased technology

In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill-biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high-tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low-tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between-skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill-biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity.