This paper demonstrates that the standard search and matching models of equilibrium
unemployment, once properly calibrated, can generate only a tiny amount
of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers
induced purely by search frictions. The analysis is centered around a specific
measure of wage dispersion— the ratio between the average wage and the lowest
(reservation) wage paid. We show that in the textbook search and matching models
this statistic (the “mean-min ratio”) can be obtained in closed form as a function
of observable variables, without any parametric assumption on the wage offer distribution.
Looking at various independent data sources suggests that, empirically,
frictional wage dispersion is larger by a factor of 20. We discuss the extent to which
three extensions of the model (risk aversion, volatile wages during employment, and
on the job search) can improve its performance.