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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. 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.
  2. 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.
  3. Dupuy Arnaud, 2011. "Sorting on Skills and Preferences: Tinbergen Meets Sattinger," Research Memorandum 017, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Gautier, Pieter A & Teulings, Coen N, 2003. "How Large are Search Frictions?," CEPR Discussion Papers 3861, C.E.P.R. Discussion Papers.
  5. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identifying hedonic models," CeMMAP working papers CWP06/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers.
  7. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2003. "Wage bargaining with on-the-job search : theory and evidence," Research Unit Working Papers 0212, Laboratoire d'Economie Appliquee, INRA.
  8. Jean-Marc Robin & Costas Meghir & Jeremy Lise, 2008. "Matching, Sorting and Wages," 2008 Meeting Papers 273, Society for Economic Dynamics.
  9. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  10. Alp Atakan, 2005. "Assortative Matching with Explicit Search Costs," 2005 Meeting Papers 218, Society for Economic Dynamics.
  11. 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.
  12. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
  13. Ekeland, Ivar & Heckman, James J. & Nesheim, Lars, 2003. "Identification and Estimation of Hedonic Models," IZA Discussion Papers 853, Institute for the Study of Labor (IZA).
  14. 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..
  15. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
  16. 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.
  17. Jesper Bagger & Rasmus Lentz, 2008. "An Equilibrium Model of Wage Dispersion with Sorting," 2008 Meeting Papers 271, Society for Economic Dynamics.
  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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