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Are Good Workers Employed by Good Firms? A Simple Test of Positive Assortative Matching Models

Author

Listed:
  • John M. Abowd (corresponding)
  • Francis Kramarz

Abstract

In this article, we test a simple version of Becker's (1973) marriage model for wage setting. This model predicts positive assortative matching. We estimate this model using linked employer--employee data for the France and the United States. We reject the simple version for both countries. The zero or negative correlation between person and firm effects is not explained by estimation biases due to a lack of mobility in the data. Several other potential explanations are proposed, including Shimer (2001) style coordination friction models. We focus on direct evidence that good workers are employed by good firms. This provides a direct empirical test of the simplest version of the Becker matching model. We start by constructing a very simple structural model of production and pay that implies positive assortative matching between a worker and her employer, exactly in the spirit of Becker. We do structural estimation using both French and American matched longitudinal employer-employee data. Because the structural model implies that the log-wage of workers is the sum of a person-specific effect and a firm-specific effect, recently developed techniques (Abowd, Creecy and Kramarz 2002) can be used to estimate its parameters. Because the Becker model predicts positive assortative matching, the person and firm effects should be positively correlated. We examine this correlation and find that it is either negligibly positive (United States) or negative (France). The article discusses one possible interpretation -- biases in the estimated parameters because the mobility process that helps identify the structural parameters is not active enough. Even though this interpretation contains a grain of truth, the bias-corrected correlations are still, respectively, negligibly positive and negative. Therefore, these results must be taken at their face value. The remainder of the article tries to understand the implications of the rejection of this model. In particular, it discusses various hypotheses that are used in order to derive and estimate the structural model. First, a true and meaningful firm effect must exist. Second, the log-wage must be the sum of a person component and of a firm component. The first hypothesis that is needed in order to generate a true and meaningful firm effect is the absence of a perfectly competitive labor market. The second hypothesis -- the absence of comparative advantage in the economy -- comes from the structure of the compensation in the model: the log-wage is the sum of a person component and of a firm component.

Suggested Citation

  • 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 385, Econometric Society.
  • Handle: RePEc:ecm:nawm04:385
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    Citations

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    Cited by:

    1. Andrews, M.J. & Gill, L. & Schank, T. & Upward, R., 2012. "High wage workers match with high wage firms: Clear evidence of the effects of limited mobility bias," Economics Letters, Elsevier, vol. 117(3), pages 824-827.
    2. Woodcock, Simon D., 2015. "Match effects," Research in Economics, Elsevier, vol. 69(1), pages 100-121.
    3. Böheim, Renè & Horvath, Gerard Thomas & Winter-Ebmer, Rudolf, 2011. "Great expectations: Past wages and unemployment durations," Labour Economics, Elsevier, vol. 18(6), pages 778-785.
    4. Mendes, Rute & van den Berg, Gerard J. & Lindeboom, Maarten, 2010. "An empirical assessment of assortative matching in the labor market," Labour Economics, Elsevier, vol. 17(6), pages 919-929, December.
    5. Pieter A. Gautier & Coen N. Teulings, 2006. "How Large are Search Frictions?," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1193-1225, December.
    6. Marcel Fafchamps & Mans Söderbom & Najy Benhassine, 2009. "Wage Gaps and Job Sorting in African Manufacturing," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(5), pages 824-868, November.
    7. Giordano Mion & Paolo Naticchioni, 2009. "The spatial sorting and matching of skills and firms," Canadian Journal of Economics, Canadian Economics Association, vol. 42(1), pages 28-55, February.
    8. Wu, Mingqin & Chen, Bin, 2016. "Assignment of provincial officials based on economic performance: Evidence from China," China Economic Review, Elsevier, vol. 38(C), pages 60-75.
    9. 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 42, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    10. Martins, Pedro S., 2008. "Dispersion in wage premiums and firm performance," Economics Letters, Elsevier, vol. 101(1), pages 63-65, October.
    11. Kramarz, Francis & Machin, Stephen & Ouazad, Amine, 2008. "What Makes a Test Score? The Respective Contributions of Pupils, Schools, and Peers in Achievement in English Primary Education," IZA Discussion Papers 3866, Institute for the Study of Labor (IZA).
    12. Ferreira, Priscila, 2009. "Returns to job mobility: the role of observed and unobserved factors," ISER Working Paper Series 2009-12, Institute for Social and Economic Research.
    13. Woodcock Simon D, 2010. "Heterogeneity and Learning in Labor Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-69, September.
    14. Miles Finney, 2006. "An Empirical Test of Urban Labor Matching," ERSA conference papers ersa06p372, European Regional Science Association.
    15. Cornelissen, Thomas & Hübler, Olaf, 2007. "Unobserved Individual and Firm Heterogeneity in Wage and Tenure Functions: Evidence from German Linked Employer-Employee Data," IZA Discussion Papers 2741, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Sorting; assortative matching; linked employer--employee data;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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