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Identifying Sorting - In Theory

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  • Jan Eeckhout

    ()
    (Department of Economics, University of Pennsylvania)

  • Philipp Kircher

    ()
    (Department of Economics, University of Pennsylvania)

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 Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 09-007.

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Length: 30 pages
Date of creation: 02 Jan 2009
Date of revision:
Handle: RePEc:pen:papers:09-007

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

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References

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  1. Arnaud Dupuy, 2012. "Sorting on Skills and Preferences: Tinbergen Meets Sattinger," Working Papers 2012/13, Maastricht School of Management.
  2. Gerard J. van den Berg & Aico van Vuuren, 2000. "Using Firm Data to assess the Performance of Equilibrium Search Models of the Labor Market," Tinbergen Institute Discussion Papers 00-067/3, Tinbergen Institute.
  3. Pieter Gautier & Coen Teulings, 2005. "How Large are Search Frictions," 2005 Meeting Papers 175, Society for Economic Dynamics.
  4. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identification and estimation of hedonic models," CeMMAP working papers CWP07/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  5. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers 74, CREFE, Université du Québec à Montréal.
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  7. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2a, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Universite de Montreal, Departement de sciences economiques.
  9. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage bargaining with on-the-job search: theory and evidence," Working Papers 150201, Institut National de la Recherche Agronomique, France.
  10. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
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  12. 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.
  13. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2002. "Identifying Hedonic Models," American Economic Review, American Economic Association, vol. 92(2), pages 304-309, May.
  14. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  15. Rute Mendes & Gerard J. van den Berg & Maarten Lindeboom, 2007. "An Empirical Assessment of Assortative Matching in the Labor Market," Carlo Alberto Notebooks 62, Collegio Carlo Alberto.
  16. Jesper Bagger & Rasmus Lentz, 2008. "An Equilibrium Model of Wage Dispersion with Sorting," 2008 Meeting Papers 271, Society for Economic Dynamics.
  17. Rasmus Lentz & Jesper Bagger, 2009. "An Empirical Model of Wage Dispersion with Sorting," 2009 Meeting Papers 964, Society for Economic Dynamics.
  18. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers.
  19. Alp E. Atakan, 2006. "Assortative Matching with Explicit Search Costs," Econometrica, Econometric Society, vol. 74(3), pages 667-680, 05.
  20. 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..
  21. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2013. "Matching, Sorting and Wages," Sciences Po publications 11, Sciences Po.
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