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An Empirical Model of Wage Dispersion with Sorting

Author

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  • 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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    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.
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    Cited by:

    1. 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.
    2. Ghazala Azmat & Marc Möller, 2012. "The distribution of talent across contests," Economics Working Papers 1298, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2013.
    3. Cristian Bartolucci & Francesco Devicienti & Ignacio Monzón, 2018. "Identifying Sorting in Practice," American Economic Journal: Applied Economics, American Economic Association, vol. 10(4), pages 408-438, October.
    4. Emmanuele Bobbio & Henning Bunzel, 2018. "The Danish Matched Employer-Employee Data," Economics Working Papers 2018-03, Department of Economics and Business Economics, Aarhus University.
    5. Rasmus Lentz & Suphanit Piyapromdee & Jean-Marc Robin, 2018. "On Worker and Firm Heterogeneity in Wages and Employment Mobility: Evidence from Danish Register Data," PIER Discussion Papers 91, Puey Ungphakorn Institute for Economic Research, revised Aug 2018.
    6. Jacob Schwartz, 2018. "Schooling Choice, Labour Market Matching, and Wages," Papers 1803.09020, arXiv.org, revised Aug 2019.
    7. Gallen, Yana & Lesner, Rune V. & Vejlin, Rune, 2019. "The labor market gender gap in Denmark: Sorting out the past 30 years," Labour Economics, Elsevier, vol. 56(C), pages 58-67.
    8. Stefano Banfi & Sekyu Choi & Benjamín Villena-Roldán, 2018. "Sorting On-line and On-time," Documentos de Trabajo 336, Centro de Economía Aplicada, Universidad de Chile.
    9. Stéphane Bonhomme & Kerstin Holzheu & Thibaut Lamadon & Elena Manresa & Magne Mogstad & Bradley Setzler, 2020. "How Much Should we Trust Estimates of Firm Effects and Worker Sorting?," NBER Working Papers 27368, National Bureau of Economic Research, Inc.
    10. Øivind A. Nilsen & Arvid Raknerud & Terje Skjerpen, 2017. "Estimation of a model for matched panel data with high-dimensional two-way unobserved heterogeneity," Empirical Economics, Springer, vol. 53(4), pages 1657-1680, December.
    11. Philipp Ehrl, 2019. "On The Use Of Firm Fixed Effects As A Productivity Measure For Analyzing Labor Market Matching," Bulletin of Economic Research, Wiley Blackwell, vol. 71(2), pages 195-208, April.
    12. Fatih Karahan & Serdar Ozkan & Jae Song, 2019. "Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital," Staff Reports 908, Federal Reserve Bank of New York.
    13. Stijepic, Damir, 2016. "Workplace Heterogeneity and the Returns to Versatility," VfS Annual Conference 2016 (Augsburg): Demographic Change 145710, Verein für Socialpolitik / German Economic Association.
    14. Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.

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    More about this item

    Keywords

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

    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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