(a) Consider a frictional labour market with many firms and workers and a costly search process. Both employed and unemployed workers can search for a job. Explain the trade-off that an employer faces when deciding between offering workers a low wage versus a high wage. Can the wage dispersion be sustained in this market even if all firms and workers are identical? Explain. (b) Provide two independent explanations based on separate theories for why earnings may increase as an individual ages.
