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A model of the labor market under search frictions is developed, where participants are heterogeneous with respect to their productivity types and the individual decision of which type of agents to match with is endogenized. Wages are negotiated, so that all gains from trade are exploited. This has important implications for the equilibrium outcomes. In particular, two applications are studied. It is observed that countries with high (low) unemployment tend to exhibit low (high) wage dispersion. And there is evidence showing that individual and ﬁrm characteristics have more explanatory power for the French than for the American wage data. The model is able to replicate these two observations, underscoring the relevance of considering matching patterns between heterogeneous agents in the diﬀerent economies. Since the model does not feature a minimum wage, I thus provide a theory of endogenous wage compression.
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