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Identifying Sorting, In Theory

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  • Philipp Kircher

    (UPenn)

  • Jan Eeckhout

    (UPF and UPenn)

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 Society for Economic Dynamics in its series 2009 Meeting Papers with number 581.

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Date of creation: 2009
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Handle: RePEc:red:sed009:581

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References

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  1. Jesper Bagger & Rasmus Lentz, 2008. "An Equilibrium Model of Wage Dispersion with Sorting," 2008 Meeting Papers 271, Society for Economic Dynamics.
  2. Cahuc, Pierre & Postel-Vinay, Fabien & Robin, Jean-Marc, 2003. "Wage Bargaining with On-The-Job Search: Theory and Evidence," CEPR Discussion Papers 4154, C.E.P.R. Discussion Papers.
  3. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
  4. 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.
  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  6. Ivar Ekeland & James J. Heckman & Lars P. Nesheim, 2003. "Identification and Estimation of Hedonic Models," NBER Working Papers 9910, National Bureau of Economic Research, Inc.
  7. 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.
  8. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
  9. Gautier, Pieter A & Teulings, Coen N, 2005. "How Large are Search Frictions?," CEPR Discussion Papers 5229, C.E.P.R. Discussion Papers.
  10. 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.
  11. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2b, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. 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.
  13. 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.
  14. Alp Atakan, 2005. "Assortative Matching with Explicit Search Costs," 2005 Meeting Papers 218, Society for Economic Dynamics.
  15. 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.
  16. 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).
  17. Jean-Marc Robin & Costas Meghir & Jeremy Lise, 2008. "Matching, Sorting and Wages," 2008 Meeting Papers 273, Society for Economic Dynamics.
  18. 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.
  19. Rasmus Lentz & Jesper Bagger, 2009. "An Empirical Model of Wage Dispersion with Sorting," 2009 Meeting Papers 964, Society for Economic Dynamics.
  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. 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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