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Identifying Sorting: In Theory

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Author Info

  • Eeckhout, Jan

    ()
    (University of Pennsylvania)

  • Kircher, Philipp

    ()
    (London School of Economics)

Abstract

We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching between worker and firm types is positive or negative. In standard competitive matching models the wages are determined by the marginal contribution of a worker, and the marginal contribution might be higher or lower for low productivity firms depending on the production function. For every production function that induces positive sorting we can find a production function that induces negative sorting but generates identical wages. This arises even when we allow for non-competitive mismatch, for example due to search frictions. 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. While we show analytically that standard fixed effects regressions are not suitable to recover the strength of sorting, we propose an alternative procedure that measures the strength of sorting in the presence of search frictions independent of the sign of the sorting.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4004.

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Length: 31 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4004

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Related research

Keywords: sorting; assortative matching; identification; linked employer-employee data; interpretation of fixed-effects;

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References

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  1. 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..
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  7. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, 03.
  8. Mendes, Rute & van den Berg, Gerard J. & Lindeboom, Maarten, 2007. "An Empirical Assessment of Assortative Matching in the Labor Market," IZA Discussion Papers 3053, Institute for the Study of Labor (IZA).
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  10. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and decentralized price competition," LSE Research Online Documents on Economics 29705, London School of Economics and Political Science, LSE Library.
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  13. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2003. "Identification and Estimation of Hedonic Models," CESifo Working Paper Series 1031, CESifo Group Munich.
  14. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  15. Jean-Marc Robin & Costas Meghir & Jeremy Lise, 2008. "Matching, Sorting and Wages," 2008 Meeting Papers 273, Society for Economic Dynamics.
  16. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers.
  17. Stefan Bender & Till von Wachter, 2006. "In the Right Place at the Wrong Time: The Role of Firms and Luck in Young Workers' Careers," American Economic Review, American Economic Association, vol. 96(5), pages 1679-1705, December.
  18. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
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