Human Capital Accumulation and Labor Market Equilibrium

The objective of this paper is to analyse an equilibrium search model with on-the-job search and human capital accumulation. In our model wages are disperse because firms pay workers of the same productivity different wages and workers of different productivies earn different wages. New entrants to the labour market increase their wages mainly through on-the-job search. As workers gain more experience and move up the offer distribution, job-to-job transitions become less frequent and human capital accumulation dominates wage growth. This interaction generates a wage distribution that exhibits a density with a unique mode and a long and decreasing right tail as observed in the data.