Identifying Sorting, In Theory
AbstractWe 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 InfoPaper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 581.
Date of creation: 2009
Date of revision:
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Other versions of this item:
- Eeckhout, Jan & Kircher, Philipp, 2011. "Identifying sorting: in theory," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
- Jan Eeckhout & Philipp Kircher, 2009. "Identifying Sorting - In Theory," PIER Working Paper Archive 09-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Eeckhout, Jan & Kircher, Philipp, 2009. "Identifying Sorting: In Theory," IZA Discussion Papers 4004, Institute for the Study of Labor (IZA).
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
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