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Identifying sorting: in theory

Assortative Matching between workers and firms provides evidence of the complementarities or substitutes in production. The presence of complementarities is important for policies that aim to achieve the optimal allocation of resources, for example unemployment insurance. We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching is positive or negative. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e., the magnitude of the cross-partial, and the associated welfare loss. We show first that the wage for a given worker is non-monotonic in the type of his employer. This is due to the fact that in a sorting model, wages re ect the opportunity cost of mismatch. We show analytically that this non-monotonicity prevents standard form fixed effects to correlate with the true type of the form. We then propose an alternative procedure that measures the strength of sorting in the presence of search frictions. Knowing the strength of sorting facilitates the measurement of the output loss due to mismatch.

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File URL: http://eprints.lse.ac.uk/29708/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29708.

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Date of creation: Jul 2011
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Publication status: Published in Review of Economic Studies, July, 2011, 78(3), pp. 872-906. ISSN: 0034-6527
Handle: RePEc:ehl:lserod:29708
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  1. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
  2. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
  3. Mendes, Rute & van den Berg, Gerard J. & Lindeboom, Maarten, 2007. "An Empirical Assessment of Assortative Matching in the Labor Market," IZA Discussion Papers 3053, Institute for the Study of Labor (IZA).
  4. Alp Atakan, 2005. "Assortative Matching with Explicit Search Costs," 2005 Meeting Papers 218, Society for Economic Dynamics.
  5. Pieter Gautier & Coen Teulings, 2005. "How Large are Search Frictions," 2005 Meeting Papers 175, Society for Economic Dynamics.
  6. Shimer, R. & Smith, L., 1998. "Assortive Matching and Search," Papers 98-09, Michigan - Center for Research on Economic & Social Theory.
  7. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2002. "Identifying Hedonic Models," American Economic Review, American Economic Association, vol. 92(2), pages 304-309, May.
  8. Wachter, Till von & Bender, Stefan, 2004. "In the Right Place at the Wrong Time: The Role of Firms and Luck in Young Workers' Careers," IZA Discussion Papers 1348, Institute for the Study of Labor (IZA).
  9. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2003. "Identification and Estimation of Hedonic Models," CESifo Working Paper Series 1031, CESifo Group Munich.
  10. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage bargaining with on-the-job search: theory and evidence," Sciences Po publications info:hdl:2441/dc0ckec3fcb, Sciences Po.
  11. Dupuy, Arnaud, 2010. "Sorting on Skills and Preferences: Tinbergen Meets Sattinger," IZA Discussion Papers 5143, Institute for the Study of Labor (IZA).
  12. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  13. Cabrales Goitia Antonio & Calvó-Armengol Antoni & Pavoni Nicola, 2007. "Social Preferences, Skill Segregation and Wage Dynamics," Working Papers 201053, Fundacion BBVA / BBVA Foundation.
  14. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
  15. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers.
  16. Jan Eeckhout & Roberto Pinheiro, 2014. "Diverse Organizations And The Competition For Talent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 625-664, 08.
  17. Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  18. repec:dau:papers:123456789/6486 is not listed on IDEAS
  19. Jesper Bagger & Rasmus Lentz, 2008. "An Equilibrium Model of Wage Dispersion with Sorting," 2008 Meeting Papers 271, Society for Economic Dynamics.
  20. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  21. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
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