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An Empirical Model of Wage Dispersion with Sorting

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  • Jesper Bagger
  • Rasmus Lentz

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20031.

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Date of creation: Apr 2014
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Handle: RePEc:nbr:nberwo:20031

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  1. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2003. "On the Job Search and the Wage Distribution," CAM Working Papers, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics 2004-09, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  2. Jesper Bagger & Francois Fontaine & Jean-Marc Robin, 2014. "Tenure, experience, human capital and wages: a tractable equilibrium search model of wage dynamics," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP12/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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  4. Cahuc, Pierre & Postel-Vinay, Fabien & Robin, Jean-Marc, 2003. "Wage Bargaining with On-The-Job Search: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4154, C.E.P.R. Discussion Papers.
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  14. 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, Elsevier, vol. 50(4), pages 877-907, May.
  15. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(4), pages 1436-1452, July.
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  1. An Empirical Model of Wage Dispersion with Sorting
    by Christian Zimmermann in NEP-DGE blog on 2014-05-06 05:09:41

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