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Match Effects

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Abstract

We present an empirical model of earnings that controls for observable and unobservable characteristics of workers (person effects), unmeasured characteristics of their employers (firm effects), and unmeasured characteristics of worker-firm matches (match effects). The distinction between these components is important, because they have different implications for the persistence of individual earnings and the returns to employment mobility. We find that match effects, which have been ignored in previous work, are an important determinant of log earnings. They explain about 16 percent of observed variation, and much of the change in earnings when workers change employer. Specifications that omit match effects over-estimate the returns to experience by as much as 30 percent, attribute too much variation to person effects and little to firm effects, and underestimate the correlation between person and firm effects. Overall, our results suggest that some of the returns previously attributed to general human capital actually reflect the returns to sorting into higher-paying firms and better worker-firm matches.

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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-13.

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Length: 35
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:sfu:sfudps:dp07-13

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: linked employer-employee data; earnings dispersion; person and firm effects; fixed effects; random effects; labor market sorting; human capital;

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References

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  1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1377-98, November.
  2. Andrews, Martyn J. & Schank, Thorsten & Upward, Richard, 2004. "Practical estimation methods for linked employer-employee data," Discussion Papers, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics 29, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  3. Altonji, Joseph G & Shakotko, Robert A, 1987. "Do Wages Rise with Job Seniority?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(3), pages 437-59, July.
  4. John M. Abowd & Paul A. Lengermann & Kevin L. McKinney, 2002. "The Measurement of Human Capital in the U.S. Economy," Longitudinal Employer-Household Dynamics Technical Papers, Center for Economic Studies, U.S. Census Bureau 2002-09, Center for Economic Studies, U.S. Census Bureau, revised Mar 2003.
  5. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
  6. Jacob Mincer & Boyan Jovanovic, 1979. "Labor Mobility and Wages," NBER Working Papers 0357, National Bureau of Economic Research, Inc.
  7. John M. Abowd & Bryce E. Stephens & Lars Vilhuber & Fredrik Andersson & Kevin L. McKinney & Marc Roemer & Simon Woodcock, 2002. "The LEHD Infrastructure Files and the Creation of the Quarterly Workforce Indicators," Longitudinal Employer-Household Dynamics Technical Papers, Center for Economic Studies, U.S. Census Bureau 2002-05, Center for Economic Studies, U.S. Census Bureau.
  8. Robert H. Topel & Michael P. Ward, 1988. "Job Mobility and the Careers of Young Men," NBER Working Papers 2649, National Bureau of Economic Research, Inc.
  9. Ann P. Bartel & George J. Borjas, 1978. "Wage Growth and Job Turnover: An Empirical Analysis," NBER Working Papers 0285, National Bureau of Economic Research, Inc.
  10. Gruetter, Max & Lalive, Rafael, 2009. "The importance of firms in wage determination," Labour Economics, Elsevier, Elsevier, vol. 16(2), pages 149-160, April.
  11. Simon D. Woodcock, 2005. "Heterogeneity and Learning in Labor Markets," Labor and Demography, EconWPA 0511012, EconWPA.
  12. Dostie, Benoit, 2005. "Job Turnover and the Returns to Seniority," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 192-199, April.
  13. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers, Center for Economic Studies, U.S. Census Bureau 2002-06, Center for Economic Studies, U.S. Census Bureau.
  14. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 972-90, October.
  15. Andrews, Martyn J. & Gill, Len & Schank, Thorsten & Upward, Richard, 2006. "High wage workers and low wage firms : negative assortative matching or statistical artefact?," Discussion Papers, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics 42, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  16. John M. Abowd (corresponding) & Francis Kramarz, 2004. "Are Good Workers Employed by Good Firms? A Simple Test of Positive Assortative Matching Models," Econometric Society 2004 North American Winter Meetings, Econometric Society 385, Econometric Society.
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