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Identifying Equilibrium Models of Labor Market Sorting

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  • Marcus Hagedorn
  • Tzuo Hann Law
  • Iourii Manovskii

Abstract

Does the market allocate the right workers to the right jobs? Since observable (to economists) variables account for only a small fraction of the wage variance in the data, to answer this question it is essential to study assortative matching between employers and employees based on their unobserved characteristics. This paper enables this line of research. We show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker (1973) with search frictions can be identified using only matched employer-employee data on wages and labor market transitions. In particular, these data are sufficient to assess whether matching between workers and firms is assortative, whether sorting is positive or negative, and to measure the potential effect on output from moving any given worker to any given employer in the economy. We provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we extend our identification and implementation strategies to the commonly used class of models of sorting based on comparative advantage and provide a test that discriminates between these models.

Suggested Citation

  • Marcus Hagedorn & Tzuo Hann Law & Iourii Manovskii, 2012. "Identifying Equilibrium Models of Labor Market Sorting," NBER Working Papers 18661, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18661
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    2. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, March.
    3. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    4. 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..
    5. Mohamed Drissi-Bakhkhat & Michel Truchon, 2004. "Maximum likelihood approach to vote aggregation with variable probabilities," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 23(2), pages 161-185, October.
    6. 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.
    7. Alp E. Atakan, 2006. "Assortative Matching with Explicit Search Costs," Econometrica, Econometric Society, vol. 74(3), pages 667-680, May.
    8. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    9. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
    10. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
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    1. repec:eee:labeco:v:49:y:2017:i:c:p:106-127 is not listed on IDEAS
    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. Bahar Baziki, Selva & Ginja, Rita & Borota Milicevic, Teodora, 2015. "Trade Competition, Technology and Labor Re-allocation," Working Paper Series, Center for Labor Studies 2016:1, Uppsala University, Department of Economics.
    4. Leland D. Crane, 2014. "Firm Dynamics and Assortative Matching," Working Papers 14-25, Center for Economic Studies, U.S. Census Bureau.
    5. Borowczyk-Martins, Daniel & Bradley, Jake & Tarasonis, Linas, 2017. "Racial discrimination in the U.S. labor market: Employment and wage differentials by skill," Labour Economics, Elsevier, vol. 49(C), pages 106-127.
    6. Carrillo-Tudela, Carlos & Coles, Melvyn, 2015. "Quit Turnover and the Business Cycle: A Survey," IZA Discussion Papers 9366, Institute for the Study of Labor (IZA).
    7. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2013. "Mismatch, Sorting and Wage Dynamics," NBER Working Papers 18719, National Bureau of Economic Research, Inc.
    8. John M. Abowd & Francis Kramarz & Sébastien Pérez-Duarte & Ian M. Schmutte, 2018. "Sorting Between and Within Industries: A Testable Model of Assortative Matching," Annals of Economics and Statistics, GENES, issue 129, pages 1-32.
    9. Isaac Sorkin, 2016. "Ranking Firms Using Revealed Preference," 2016 Meeting Papers 66, Society for Economic Dynamics.
    10. Gordon Phillips & Kyle Herkenhoff, 2015. "The Impact of Consumer Credit Constraints on Earnings, Sorting, and Job Finding Rates of Displaced Workers," 2015 Meeting Papers 375, Society for Economic Dynamics.
    11. Merlino L.P. & Parrotta P. & Pozzoli D., 2014. "Gender differences in sorting," Research Memorandum 022, Maastricht University, Graduate School of Business and Economics (GSBE).
    12. Fabien Postel-Vinay & Ilse Lindenlaub, 2017. "Multidimensional Sorting under Random Search," 2017 Meeting Papers 501, Society for Economic Dynamics.
    13. Benjamin Lochner & Bastian Schulz, 2016. "Labor Market Sorting in Germany," CESifo Working Paper Series 6066, CESifo Group Munich.
    14. repec:aea:jeclit:v:55:y:2017:i:2:p:493-544 is not listed on IDEAS
    15. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2017. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," Working Papers 2017-012, Human Capital and Economic Opportunity Working Group.
    16. Jacob Schwartz, 2018. "Schooling Choice, Labour Market Matching, and Wages," Papers 1803.09020, arXiv.org, revised Apr 2018.
    17. Matilde Bombardini & Gianluca Orefice & Maria D. Tito, 2015. "Does Exporting Improve Matching? Evidence from French Employer-Employee Data," NBER Working Papers 21225, National Bureau of Economic Research, Inc.
    18. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," NBER Working Papers 22274, National Bureau of Economic Research, Inc.
    19. Elena Krasnokutskaya, 2016. "Trading across Borders in Online Auctions," 2016 Meeting Papers 1537, Society for Economic Dynamics.
    20. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," Working Papers 16-25, Center for Economic Studies, U.S. Census Bureau.
    21. Marcus Hagedorn & Iourii Manovskii, 2014. "The Research Agenda: Marcus Hagedorn and Iourii Manovskii on Theory Ahead of Identification," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 15(1), April.
    22. repec:eee:labeco:v:50:y:2018:i:c:p:45-66 is not listed on IDEAS

    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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