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An Empirical Model of Wage Dispersion with Sorting

  • Jesper Bagger
  • Rasmus Lentz

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%.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20031.

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Date of creation: Apr 2014
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Handle: RePEc:nbr:nberwo:20031
Note: EFG LS
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  1. Cristian Bartolucci & Francesco Devicienti, 2013. "BetterWorkers Move to Better Firms: A Simple Test to Identify Sorting," Carlo Alberto Notebooks 332, Collegio Carlo Alberto.
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  15. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
  16. Jean-Marc Robin & Costas Meghir & Jeremy Lise, 2008. "Matching, Sorting and Wages," 2008 Meeting Papers 273, Society for Economic Dynamics.
  17. Giovanni L. Violante & Per Krusell & Andreas Hornstein, 2006. "Frictional wage dispersion in search models: a quantitative assessment," Working Paper 06-07, Federal Reserve Bank of Richmond.
  18. Jolivet, Gregory & Postel-Vinay, Fabien & Robin, Jean-Marc, 2006. "The empirical content of the job search model: Labor mobility and wage distributions in Europe and the US," European Economic Review, Elsevier, vol. 50(4), pages 877-907, May.
  19. H. Bunzel & B. J. Christensen & P. Jensen & N. M. Kiefer & L. Korsholm & L. Muus & G. R. Neumann & M. Rosholm, 2001. "Specification and Estimation of Equilibrium Search Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 90-126, January.
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  21. Pieter A. Gautier & Coen N. Teulings, 2011. "Sorting and the Output Loss due to Search Frictions," Tinbergen Institute Discussion Papers 11-010/3, Tinbergen Institute, revised 26 Jan 2012.
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