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An Empirical Model of Wage Dispersion with Sorting

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Listed author(s):
  • Jesper Bagger

    ()

    (Royal Holloway, University of London)

  • Rasmus Lentz

    (University of Wisconsin-Maddison)

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    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%.

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    File URL: ftp://ftp.econ.au.dk/afn/wp/14/wp14_11.pdf
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    Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2014-11.

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    Length: 53
    Date of creation: 01 Apr 2014
    Handle: RePEc:aah:aarhec:2014-11
    Contact details of provider: Web page: http://www.econ.au.dk/afn/

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

    Find related papers by 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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    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, vol. 68(2), pages 343-370, March.
    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, 03.
    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, vol. 104(6), pages 1551-1596, June.
    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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    12. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    13. Cristian Bartolucci & Francesco Devicienti, 2012. "Better Workers Move to Better Firms: A Simple Test to Identify Sorting," Carlo Alberto Notebooks 259, Collegio Carlo Alberto.
    14. Jolivet, Gregory & Postel-Vinay, Fabien & Robin, Jean-Marc, 2006. "The empirical content of the job search model: Labor mobility and wage distributions in Europe and the US," European Economic Review, Elsevier, vol. 50(4), pages 877-907, May.
    15. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, 03.
    16. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
    17. H. Bunzel & Bent Jesper Christensen & Peter Jensen & Nicholas Kiefer & L. Korsholm & L. Muus & G. R. Neumann & Michael Rosholm, 2001. "Specification and Estimation of Equilibrium Search Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 90-126, January.
    18. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.
    19. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
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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. 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.
    4. Stijepic, Damir, 2016. "Workplace Heterogeneity and the Returns to Versatility," Annual Conference 2016 (Augsburg): Demographic Change 145710, Verein für Socialpolitik / German Economic Association.
    5. Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.

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