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An Empirical Model of Wage Dispersion with Sorting

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  • Jesper Bagger

    ()
    (Royal Holloway, University of London)

  • Rasmus Lentz

    (University of Wisconsin-Maddison)

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    Abstract

    This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity. Workers differ in their permanent skill level and firms differ with respect to productivity. Positive (negative) sorting results if the match production function is supermodular (submodular). The model is estimated on Danish matched employer-employee data. We find evidence of positive assortative matching. In the estimated equilibrium match distribution, the correlation between worker skill and firm productivity is 0.12. The assortative matching has a substantial impact on wage dispersion. We decompose wage variation into four sources: Worker heterogeneity, firm heterogeneity, frictions, and sorting. Worker heterogeneity contributes 51% of the variation, firm heterogeneity contributes 11%, frictions 23%, and finally sorting contributes 15%. We measure the output loss due to mismatch by asking how much greater output would be if the estimated population of matches were perfectly positively assorted. In this case, output would increase by 7.7%.

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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2014-11.

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    Length: 53
    Date of creation: 01 Apr 2014
    Date of revision:
    Handle: RePEc:aah:aarhec:2014-11

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: Sorting; Worker heterogeneity; Firm heterogeneity; On-the-job search; Wage dispersion; Matched employer-employee data;

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    References

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    1. Philipp Kircher & Jan Eeckhout, 2009. "Identifying Sorting, In Theory," 2009 Meeting Papers 581, Society for Economic Dynamics.
    2. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2007. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," NBER Working Papers 13674, National Bureau of Economic Research, Inc.
    3. Cahuc, Pierre & Postel-Vinay, Fabien & Robin, Jean-Marc, 2003. "Wage Bargaining with On-The-Job Search: Theory and Evidence," CEPR Discussion Papers 4154, C.E.P.R. Discussion Papers.
    4. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
    5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
    6. Jesper Bagger & François Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2011. "Tenure, Experience, Human Capital and Wages: A Tractable Equilibrium Search Model of Wage Dynamics," Sciences Po publications info:hdl:2441/eu4vqp9ompq, Sciences Po.
    7. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    8. H. Bunzel & B. J. Christensen & P. Jensen & N. M. Kiefer & L. Korsholm & L. Muus & G. R. Neumann & M. Rosholm, 2001. "Specification and Estimation of Equilibrium Search Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 90-126, January.
    9. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
    10. Shimer, R. & Smith, L., 1998. "Assortive Matching and Search," Papers 98-09, Michigan - Center for Research on Economic & Social Theory.
    11. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
    12. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
    13. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
    14. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, 03.
    15. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    16. Jolivet, Gregory & Postel-Vinay, Fabien & Robin, Jean-Marc, 2006. "The empirical content of the job search model: Labor mobility and wage distributions in Europe and the US," European Economic Review, Elsevier, vol. 50(4), pages 877-907, May.
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