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Sorting and Wage Inequality

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  • Kory Kantenga

    (University of Pennsylvania)

Abstract

We measure the roles of the permanent component of worker and firm produc- tivities, complementarities between them, search frictions, and equilibrium sorting in driving German wage dispersion. We do this using a standard assortative matching model with on-the-job search. The model is identified and estimated using matched employer-employee data on wages and labor market transitions without imposing para- metric restrictions on the production technology. The model’s fit to the wage data is comparable to prominent wage regressions with additive worker and firm fixed effects that use many more degrees of freedom. Moreover, we propose a direct test that rejects the restrictions underlying the additive specification. We use the model to decompose the rise in German wage dispersion between the 1990s and the 2000s. We find that changes in the production function and the induced changes in equilibrium sorting pat- terns account for virtually all the rise in the observed wage dispersion. Search frictions are an important determinant of the level of wage dispersion but have had little impact on its rise over time.

Suggested Citation

  • Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:660
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    References listed on IDEAS

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    Cited by:

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    2. Benjamin Lochner & Bastian Schulz, 2016. "Labor Market Sorting in Germany," CESifo Working Paper Series 6066, CESifo.
    3. Jinkins, David & Morin, Annaïg, 2018. "Job-to-job transitions, sorting, and wage growth," Labour Economics, Elsevier, vol. 55(C), pages 300-327.
    4. Jacob Schwartz, 2018. "Schooling Choice, Labour Market Matching, and Wages," Papers 1803.09020, arXiv.org, revised Aug 2019.

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