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Labor Market Models of Worker and Firm Heterogeneity

  • Rasmus Lentz
  • Dale T. Mortensen

    ()

    (Department of Economics, University of Wisconsin, Madison, Wisconsin 53706, NBER, and CAM
    Department of Economics, Northwestern University, Evanston, Illinois 60208, Aarhus University, NBER, and IZA)

Microeconomic data on individual firms and employer-employee matches reveal substantial and persistent dispersion in firm size, productivity, and average wage paid and a positive correlation between each pair. To the extent that intrinsic differences in firm productivity explain these facts, there are several important consequences. First, the reallocation of employment from less to more productive firms will yield efficiency gains. Second, workers will find it in their interest to seek out higher-paying employers. Recent research has provided support for both hypotheses. Third, the existence of worker and employer heterogeneity offers possible gains from sorting. However, because the problem of identifying the presence of sorting is model dependent, it is too early for conclusions about its significance.

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File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.102308.124511
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Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 2 (2010)
Issue (Month): 1 (09)
Pages: 577-602

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Handle: RePEc:anr:reveco:v:2:y:2010:p:577-602
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