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An Empirical Model of Wage Dispersion with Sorting


  • Rasmus Lentz

    (University of Wisconsin-Madison)


The paper studies contributions to wage dispersion in a model that allows for sorting in firm-worker matches. The model is a general equilibrium on-the-job search model with wage formation similar to that of Cahuc et al. (2006). Workers differ in their permanent skill level and firms differ with respect to productivity. As shown in Lentz (2010), in this setting, positive (negative) sorting results if the match production function is supermodular (submodular). The model is estimated on Danish matched employer-employee data that cover the entire worker and firm population at a weekly observation frequency. The data allow a detailed view of worker and firm conditional spell hazard heterogeneity, which is at the core of the paper's identification strategy. In addition the data contain match wages which also enter the estimation, however, the estimation does not employ the direct strategy of estimating the correlation between worker and firm wage fixed effects. As shown in previous versions of this paper as well as de Melo 2008 and Lise et al. 2008, this approach fails to identify sorting on worker-firm types in models where wages are possibly non-monotone functions of the fundamental worker skill and firm productivity heterogeneity. Preliminary estimates point to positive sorting between worker skill and firm productivity, although with modest efficiency gains if the estimated population of jobs and workers are allocated efficiently.

Suggested Citation

  • Rasmus Lentz, 2012. "An Empirical Model of Wage Dispersion with Sorting," 2012 Meeting Papers 1040, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1040

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    References listed on IDEAS

    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    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. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
    4. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    5. Shintaro Yamaguchi, 2010. "Job Search, Bargaining, and Wage Dynamics," Journal of Labor Economics, University of Chicago Press, vol. 28(3), pages 595-631, July.
    6. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
    7. 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.
    8. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
    9. 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.
    10. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    11. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, March.
    12. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
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    Cited by:

    1. Gene Grossman, 2013. "Heterogeneous workers and international trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(2), pages 211-245, June.

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