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Identifying Sorting--In Theory

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  • Jan Eeckhout
  • Philipp Kircher

Abstract

Assortative matching between workers and firms provides evidence of the complementarities or substitutes in production. The presence of complementarities is important for policies that aim to achieve the optimal allocation of resources, e.g. unemployment insurance. We argue that using wage data alone, it is virtually impossible to identify whether assortative matching is positive or negative. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e. the magnitude of the cross-partial and the associated welfare loss. We first show that the wage for a given worker is non-monotonic in the type of his employer. This is due to the fact that in a sorting model, wages reflect the opportunity cost of mismatch. We analytically show that this non-monotonicity prevents standard firm fixed effects to correlate with the true type of the firm. We then propose an alternative procedure that measures the strength of sorting in the presence of search frictions. Knowing the strength of sorting facilitates the measurement of the output loss due to mismatch. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 3 ()
Pages: 872-906

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Handle: RePEc:oup:restud:v:78:y:2011:i:3:p:872-906

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  7. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 74, CREFE, Université du Québec à Montréal.
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  11. Pieter Gautier & Coen Teulings, 2005. "How Large are Search Frictions," 2005 Meeting Papers, Society for Economic Dynamics 175, Society for Economic Dynamics.
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  14. Jesper Bagger & Rasmus Lentz, 2008. "An Equilibrium Model of Wage Dispersion with Sorting," 2008 Meeting Papers, Society for Economic Dynamics 271, Society for Economic Dynamics.
  15. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  16. Arnaud Dupuy, 2012. "Sorting on Skills and Preferences: Tinbergen Meets Sattinger," Working Papers, Maastricht School of Management 2012/13, Maastricht School of Management.
  17. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, Econometric Society, vol. 43(3), pages 455-68, May.
  18. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identifying hedonic models," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP06/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  19. Gérard VAN DEN BERG & Aïco VAN VUUREN, 2002. "Using Firm Data to Assess the Performance of Equilibrium Search Models of the Labor Market," Annales d'Economie et de Statistique, ENSAE, ENSAE, issue 67-68, pages 227-256.
  20. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
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