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Agent Heterogeneity and Learning: An Application to Labor Markets

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  • Simon D Woodcock

Abstract

I develop a matching model with heterogeneous workers, rms, and worker-firm matches, and apply it to longitudinal linked data on employers and employees. Workers vary in their marginal product when employed and their value of leisure when unemployed. Firms vary in their marginal product and cost of maintaining a vacancy. The marginal product of a worker-firm match also depends on a match-specific interaction between worker and rm that I call match quality. Agents have complete information about worker and rm heterogeneity, and symmetric but incomplete information about match quality. They learn its value slowly by observing production outcomes. There are two key results. First, under a Nash bargain, the equilibrium wage is linear in a person-specific component, a firm-specific component, and the posterior mean of beliefs about match quality. Second, in each period the separation decision depends only on the posterior mean of beliefs and person and rm characteristics. These results have several implications for an empirical model of earnings with person and rm e ects. The rst implies that residuals within a worker-firm match are a martingale; the second implies the distribution of earnings is truncated. I test predictions from the matching model using data from the Longitudinal Employer-Household Dynamics (LEHD) Program at the US Census Bureau. I present both xed and mixed model specifications of the equilibrium wage function, taking account of structural aspects implied by the learning process. In the most general specification, earnings residuals have a completely unstructured covariance within a worker-firm match. I estimate and test a variety of more parsimonious error structures, including the martingale structure implied by the learning process. I nd considerable support for the matching model in these data.

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File URL: ftp://ftp2.census.gov/ces/tp/tp-2002-20.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Longitudinal Employer-Household Dynamics Technical Papers with number 2002-20.

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Length: 74 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:cen:tpaper:2002-20

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Web page: http://lehd.did.census.gov/led/
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  1. Ann P. Bartel & George J. Borjas, 1981. "Wage Growth and Job Turnover: An Empirical Analysis," NBER Chapters, in: Studies in Labor Markets, pages 65-90 National Bureau of Economic Research, Inc.
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  8. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2b, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Henry S. Farber & Robert Gibbons, 1991. "Learning and Wage Dynamics," NBER Working Papers 3764, National Bureau of Economic Research, Inc.
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  15. �va Nagyp�l, 2007. "Learning by Doing vs. Learning About Match Quality: Can We Tell Them Apart?," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 537-566.
  16. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
  17. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  18. Abowd, John M. & Kramarz, Francis, 1999. "Econometric analyses of linked employer-employee data," Labour Economics, Elsevier, vol. 6(1), pages 53-74, March.
  19. Benoit Dostie, 2003. "Controlling for Demand Side Factors and Job Matching: Maximum Likelihood Estimates of the Returns to Seniority Using Matched Employer-Employee Data," Cahiers de recherche 03-02, HEC Montréal, Institut d'économie appliquée.
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Cited by:
  1. John M. Abowd & Paul A. Lengermann & Kevin L. McKinney, 2002. "The Measurement of Human Capital in the U.S. Economy," Longitudinal Employer-Household Dynamics Technical Papers 2002-09, Center for Economic Studies, U.S. Census Bureau, revised Mar 2003.

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