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An Empirical Model of Wage Dispersion with Sorting

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  • Jesper Bagger
  • Rasmus Lentz

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," NBER Working Papers 20031, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20031
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. An Empirical Model of Wage Dispersion with Sorting
      by Christian Zimmermann in NEP-DGE blog on 2014-05-06 10:09:41

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    Cited by:

    1. Bartolucci, Cristian & Devicienti, Francesco & Monzón, Ignacio, 2015. "Identifying Sorting in Practice," IZA Discussion Papers 9411, Institute for the Study of Labor (IZA).
    2. Cristian Bartolucci & Francesco Devicienti, 2012. "Better Workers Move to Better Firms: A Simple Test to Identify Sorting," Carlo Alberto Notebooks 259, Collegio Carlo Alberto.
    3. Carrillo-Tudela, Carlos & Kaas, Leo, 2011. "Wage Dispersion and Labor Turnover with Adverse Selection," IZA Discussion Papers 5936, Institute for the Study of Labor (IZA).
    4. 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.
    5. Leland D. Crane, 2014. "Firm Dynamics and Assortative Matching," Working Papers 14-25, Center for Economic Studies, U.S. Census Bureau.
    6. 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.
    7. Torben Sørensen & Rune Vejlin, 2013. "The importance of worker, firm and match effects in the formation of wages," Empirical Economics, Springer, vol. 45(1), pages 435-464, August.
    8. Battisti, Michele, 2017. "High wage workers and high wage peers," Labour Economics, Elsevier, vol. 46(C), pages 47-63.
    9. Jan Eeckhout & Philipp Kircher, 2011. "Identifying Sorting--In Theory," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 872-906.
    10. Stijepic, Damir, 2015. "Job Mobility and Sorting: Theory and Evidence," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112821, Verein für Socialpolitik / German Economic Association.
    11. Jacob Schwartz, 2018. "Schooling Choice, Labour Market Matching, and Wages," Papers 1803.09020, arXiv.org, revised Apr 2018.
    12. Rasmus Lentz, 2014. "Optimal Employment Contracts with Hidden Search," NBER Working Papers 19988, National Bureau of Economic Research, Inc.
    13. 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.
    14. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1179-0 is not listed on IDEAS
    15. Katsuya Takii, 2011. "Persistent Productivity Differences Between Firms," OSIPP Discussion Paper 11E004, Osaka School of International Public Policy, Osaka University.
    16. John Kennes & Daniel le Maire, 2013. "Job Heterogeneity and Coordination Frictions," Economics Working Papers 2013-09, Department of Economics and Business Economics, Aarhus University.
    17. Emmanuele Bobbio & Henning Bunzel, 2018. "The Danish Matched Employer-Employee Data," Economics Working Papers 2018-03, Department of Economics and Business Economics, Aarhus University.
    18. Jan Eeckhout & Philipp Kircher, 2011. "The Research Agenda: Jan Eeckhout and Philipp Kircher on Sorting in Macroeconomic Models," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 13(1), November.
    19. Stijepic, Damir, 2016. "Workplace Heterogeneity and the Returns to Versatility," Annual Conference 2016 (Augsburg): Demographic Change 145710, Verein für Socialpolitik / German Economic Association.
    20. Kory Kantenga, 2016. "Sorting and Wage Inequality," 2016 Meeting Papers 660, Society for Economic Dynamics.
    21. Michèle A. Weynandt, 2014. "Selective Firing and Lemons," NRN working papers 2014-05, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.

    More about this item

    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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