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Match Effects

  • Woodcock, Simon

We present an empirical model of earnings that controls for observable and unobservable characteristics of workers (person effects), unmeasured characteristics of their employers (firm effects), and unmeasured characteristics of worker-firm matches (match effects). We interpret these as the returns to general human capital, firm-specific human capital, and match-specific human capital, respectively. We stress the importance of match effects because the returns to match-specific human capital will be incorrectly attributed to general and/or firm-specific human capital when match effects are omitted, and because general and specific human capital have very different implications for the economic cost of job destruction. We find that slightly more than half of observed variation in log earnings is attributable to general human capital, 22 percent is attributable to firm-specific human capital, and 16 percent to match-specific human capital. Specifications that omit match effects over-estimate the returns to experience by as much as 50 percent, over-estimate the returns to a college education by as much as 8 percent, attribute too much variation to person effects, and too little to firm effects. Our results suggest that considerable earnings variation previously attributed to general human capital -- both observed and unobserved -- is in fact attributable to workers sorting into higher-paying firms and better worker-firm matches.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 154.

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Date of creation: Sep 2006
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Handle: RePEc:pra:mprapa:154
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  13. 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.
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  19. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2b, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. Gruetter, Max & Lalive, Rafael, 2004. "The Importance of Firms in Wage Determination," IZA Discussion Papers 1367, Institute for the Study of Labor (IZA).
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  25. 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.
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