Identifying Sorting--In Theory
AbstractAssortative 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 InfoArticle provided by Oxford University Press in its journal The Review of Economic Studies.
Volume (Year): 78 (2011)
Issue (Month): 3 ()
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Other versions of this item:
- Eeckhout, Jan & Kircher, Philipp, 2009. "Identifying Sorting: In Theory," IZA Discussion Papers 4004, Institute for the Study of Labor (IZA).
- Jan Eeckhout & Philipp Kircher, 2009. "Identifying Sorting - In Theory," PIER Working Paper Archive 09-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Philipp Kircher & Jan Eeckhout, 2009. "Identifying Sorting, In Theory," 2009 Meeting Papers 581, Society for Economic Dynamics.
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
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