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Identifying Equilibrium Models of Labor Market Sorting

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  • Marcus Hagedorn
  • Tzuo Hann Law
  • Iourii Manovskii

Abstract

Does the market allocate the right workers to the right jobs? Since observable (to economists) variables account for only a small fraction of the wage variance in the data, to answer this question it is essential to study assortative matching between employers and employees based on their unobserved characteristics. This paper enables this line of research. We show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker (1973) with search frictions can be identified using only matched employer-employee data on wages and labor market transitions. In particular, these data are sufficient to assess whether matching between workers and firms is assortative, whether sorting is positive or negative, and to measure the potential effect on output from moving any given worker to any given employer in the economy. We provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we extend our identification and implementation strategies to the commonly used class of models of sorting based on comparative advantage and provide a test that discriminates between these models.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18661.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18661

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  1. Dale T. Mortensen & Bent Jesper Christensen & Jesper Bagger, 2010. "Wage and Productivity Dispersion: Labor Quality or Rent Sharing?," 2010 Meeting Papers, Society for Economic Dynamics 758, Society for Economic Dynamics.
  2. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, Elsevier, vol. 98(2), pages 232-260, June.
  3. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum, Oslo University, Department of Economics 37/1995, Oslo University, Department of Economics.
  4. Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(4), pages 1436-1452, July.
  6. Alp E. Atakan, 2006. "Assortative Matching with Explicit Search Costs," Econometrica, Econometric Society, Econometric Society, vol. 74(3), pages 667-680, 05.
  7. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  8. 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.
  9. Drissi, Mohamed & Truchon, Michel, 2002. "Maximum Likelihood Approach to Vote Aggregation with Variable Probabilities," Cahiers de recherche, Université Laval - Département d'économique 0211, Université Laval - Département d'économique.
  10. 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, Center for Economic Studies, U.S. Census Bureau 2002-06, Center for Economic Studies, U.S. Census Bureau.
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Cited by:
  1. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2013. "Mismatch, Sorting and Wage Dynamics," NBER Working Papers 18719, National Bureau of Economic Research, Inc.
  2. Daniel Borowczyk-Martins & Jake Bradley & Linas Tarasonis, 2014. "Racial Discrimination in the U.S. Labor Market: Employment and Wage Differentials by Skill," AMSE Working Papers 1413, Aix-Marseille School of Economics, Marseille, France, revised Apr 2014.
  3. Marcus Hagedorn & Iourii Manoskii, 2014. "The Research Agenda: Marcus Hagedorn and Iourii Manovskii on Theory Ahead of Identification," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 15(1), April.

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