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Match Effects

Abstract

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). The distinction between these components is important, because they have different implications for the persistence of individual earnings and the returns to employment mobility. We find that match effects, which have been ignored in previous work, are an important determinant of log earnings. They explain about 16 percent of observed variation, and much of the change in earnings when workers change employer. Specifications that omit match effects over-estimate the returns to experience by as much as 30 percent, attribute too much variation to person effects and little to firm effects, and underestimate the correlation between person and firm effects. Overall, our results suggest that some of the returns previously attributed to general human capital actually reflect the returns to sorting into higher-paying firms and better worker-firm matches.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp07-13.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-13.

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Length: 35
Date of creation: Aug 2007
Handle: RePEc:sfu:sfudps:dp07-13
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Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada

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Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html

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Keywords: linked employer-employee data; earnings dispersion; person and firm effects; fixed effects; random effects; labor market sorting; human capital;

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Find related papers by JEL classification:
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
  • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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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.
  14. John M. Abowd & Bryce E. Stephens & Lars Vilhuber & Fredrik Andersson & Kevin L. McKinney & Marc Roemer & Simon Woodcock, 2009. "The LEHD Infrastructure Files and the Creation of the Quarterly Workforce Indicators," NBER Chapters,in: Producer Dynamics: New Evidence from Micro Data, pages 149-230 National Bureau of Economic Research, Inc.
  15. 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..
  16. 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.
  17. Jacob Mincer & Boyan Jovanovic, 1981. "Labor Mobility and Wages," NBER Chapters,in: Studies in Labor Markets, pages 21-64 National Bureau of Economic Research, Inc.
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  20. 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.
  21. Dostie, Benoit, 2005. "Job Turnover and the Returns to Seniority," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 192-199, April.
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