We study the distribution of labor income during large devaluations. Across coun- tries, inequality falls after large devaluations within the context of a surge in inflation and a fall and subsequent recovery of real labor income. To better understand inequality dynamics, we use a novel administrative dataset covering the 2002 Argentinean devaluation. We show that following a homogeneous fall in real labor income across workers, the bottom of the income distribution recovers faster than the top. Low labor mobility and lack of union coverage among high-income workers explain their slow recovery.
We develop a model of a frictional labor market with workers’ productivity and aggregate monetary shocks, sticky wages, and a two-sided lack of commitment between firms and workers. As a result of wage rigidity and limited commitment, inefficient endogenous separations arise. We characterize the equilibrium separation and job-finding rates analytically and show how to recover the unobserved steady-state distribution of the wage-to-productivity ratios with microdata on wage changes and employment transitions. The latter is a sufficient statistic that summarizes the prevalence of inefficient job separations and the aggregate response of employment and real wages to a monetary shock.