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High Wage Workers Match with High Wage Firms: Clear Evidence of the Effects of Limited Mobility Bias

Author Info

Listed author(s):
  • Andrews, Martyn J.

    ()

    (University of Manchester)

  • Gill, Leonard

    ()

    (University of Manchester)

  • Schank, Thorsten

    ()

    (University of Mainz)

  • Upward, Richard

    ()

    (University of Nottingham)

Abstract

Positive assortative matching implies that high productivity workers and firms match together. However, there is almost no evidence of a positive correlation between the worker and firm contributions in two-way fixed-effects wage equations. This could be the result of a bias caused by standard estimation error. Using German social security records we show that the effect of this bias is substantial in samples with limited inter-firm movement. The correlation between worker and firm contributions to wage equations is unambiguously positive.

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File URL: http://ftp.iza.org/dp6662.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6662.

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Length: 13 pages
Date of creation: Jun 2012
Publication status: published in: Economics Letters, 2012, 117 (3), 824-827
Handle: RePEc:iza:izadps:dp6662
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Keywords: fixed effects; linked employer-employee panel data; limited mobility bias;

Other versions of this item:

Find related papers by JEL classification:
  • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
  • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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  1. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
  2. Gruetter, Max & Lalive, Rafael, 2009. "The importance of firms in wage determination," Labour Economics, Elsevier, vol. 16(2), pages 149-160, April.
  3. Rasmus Lentz & Jesper Bagger, 2009. "An Empirical Model of Wage Dispersion with Sorting," 2009 Meeting Papers 964, Society for Economic Dynamics.
  4. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
  5. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
  6. Woodcock, Simon D., 2015. "Match effects," Research in Economics, Elsevier, vol. 69(1), pages 100-121.
  7. Jan Eeckhout & Philipp Kircher, 2011. "Identifying Sorting--In Theory," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 872-906.
  8. 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.
  9. 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.
  10. John Abowd & Francis Kramarz & Sebastien Perez-Duarte & Ian Schmutte, 2009. "A Formal Test of Assortative Matching in the Labor Market," Working Papers 09-40, Center for Economic Studies, U.S. Census Bureau.
  11. 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..
  12. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
  13. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
  14. M. J. Andrews & L. Gill & T. Schank & R. Upward, 2008. "High wage workers and low wage firms: negative assortative matching or limited mobility bias?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 171(3), pages 673-697.
  15. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-468, May.
  16. Amine Ouazad, 2008. "A2REG: Stata module to estimate models with two fixed effects," Statistical Software Components S456942, Boston College Department of Economics.
  17. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
  18. Goux, Dominique & Maurin, Eric, 1999. "Persistence of Interindustry Wage Differentials: A Reexamination Using Matched Worker-Firm Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 492-533, July.
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Cited by:

  1. Philipp Ehrl, 2014. "High-wage workers and high-productivity firms - a regional view on matching in Germany," Working Papers 149, Bavarian Graduate Program in Economics (BGPE).
  2. Card, David & Cardoso, Ana Rute & Heining, Jörg & Kline, Patrick, 2016. "Firms and Labor Market Inequality: Evidence and Some Theory," IZA Discussion Papers 9850, Institute for the Study of Labor (IZA).
  3. González de San Román, Ainara & Rebollo-Sanz, Yolanda F., 2014. "An estimation of worker and firm effects with censored data," Economics Discussion Papers 2014-28, Kiel Institute for the World Economy (IfW).
  4. Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.

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