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An Empirical Model of Wage Dispersion with Sorting

Author

Listed:
  • Jesper Bagger

    () (Royal Holloway, University of London)

  • Rasmus Lentz

    (University of Wisconsin-Maddison)

Abstract

This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity. Workers differ in their permanent skill level and firms differ with respect to productivity. Positive (negative) sorting results if the match production function is supermodular (submodular). The model is estimated on Danish matched employer-employee data. We find evidence of positive assortative matching. In the estimated equilibrium match distribution, the correlation between worker skill and firm productivity is 0.12. The assortative matching has a substantial impact on wage dispersion. We decompose wage variation into four sources: Worker heterogeneity, firm heterogeneity, frictions, and sorting. Worker heterogeneity contributes 51% of the variation, firm heterogeneity contributes 11%, frictions 23%, and finally sorting contributes 15%. We measure the output loss due to mismatch by asking how much greater output would be if the estimated population of matches were perfectly positively assorted. In this case, output would increase by 7.7%.

Suggested Citation

  • Jesper Bagger & Rasmus Lentz, 2014. "An Empirical Model of Wage Dispersion with Sorting," Economics Working Papers 2014-11, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2014-11
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    File URL: ftp://ftp.econ.au.dk/afn/wp/14/wp14_11.pdf
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    References listed on IDEAS

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    1. Pieter A. Gautier & Coen N. Teulings, 2015. "Sorting And The Output Loss Due To Search Frictions," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1136-1166, December.
    2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    3. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
    4. Jan Eeckhout & Philipp Kircher, 2011. "Identifying Sorting--In Theory," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 872-906.
    5. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2016. "Matching, Sorting and Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 63-87, January.
    6. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, pages 343-370.
    7. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    8. Jesper Bagger & Fran?ois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2014. "Tenure, Experience, Human Capital, and Wages: A Tractable Equilibrium Search Model of Wage Dynamics," American Economic Review, American Economic Association, pages 1551-1596.
    9. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
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    Citations

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    Cited by:

    1. Bartolucci, Cristian & Devicienti, Francesco & Monzón, Ignacio, 2015. "Identifying Sorting in Practice," IZA Discussion Papers 9411, Institute for the Study of Labor (IZA).
    2. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2016. "Matching, Sorting and Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 63-87, January.
    3. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1179-0 is not listed on IDEAS
    4. Stijepic, Damir, 2015. "Job Mobility and Sorting: Theory and Evidence," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112821, Verein für Socialpolitik / German Economic Association.
    5. Stijepic, Damir, 2016. "Workplace Heterogeneity and the Returns to Versatility," Annual Conference 2016 (Augsburg): Demographic Change 145710, Verein für Socialpolitik / German Economic Association.
    6. Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.

    More about this item

    Keywords

    Sorting; Worker heterogeneity; Firm heterogeneity; On-the-job search; Wage dispersion; Matched employer-employee data;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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