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Heterogeneity and Learning in Labor Markets

  • Simon D. Woodcock

    (Simon Fraser University)

This paper examines the role of agent heterogeneity and learning on wage dispersion and employment dynamics. In the first half of the paper, I present an equilibrium matching model where heterogeneous workers and firms learn about match quality and bargain over wages. The model generalizes Jovanovic (1979) to the case of heterogeneous workers and firms. Equilibrium wage dispersion arises due to productivity differences across workers, technological differences across firms, and heterogeneity in beliefs about match quality. Under a simple CRS technology, the equilibrium wage is additively separable in worker- and firm-specific components, and in the posterior mean of beliefs about match quality. This parallels the 'person and firm effects' empirical specification of Abowd et. al. (1999, AKM) and others. It consequently provides a theoretical context for the AKM model, and a formal economic interpretation of their empirical person and firm effects. The model also yields an assortative matching result that predicts a negative correlation between estimated person and firm effects, which is consistent with most empirical evidence. Finally, the model makes novel predictions about the relationship between the person and firm effects and separation behavior, job duration, and firm size. In the second half of the paper, I test the model's empirical predictions. I estimate fixed and mixed effects specifications of the equilibrium wage function on the LEHD database. The mixed effect specifications generalize the earlier work of AKM and others. The learning component of the matching model implies a specific structure for the error covariance. I exploit this structure to test whether earnings residuals are consistent with Bayesian learning, and to estimate structural parameters of the matching model. I find considerable support for the matching model in these data.

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File URL: http://econwpa.repec.org/eps/lab/papers/0511/0511012.pdf
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Paper provided by EconWPA in its series Labor and Demography with number 0511012.

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Length: 60 pages
Date of creation: 15 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpla:0511012
Note: Type of Document - pdf; pages: 60
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Andrews, Martyn J. & Gill, Len & Schank, Thorsten & Upward, Richard, 2006. "High wage workers and low wage firms : negative assortative matching or statistical artefact?," Discussion Papers 42, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  2. John M. Abowd & Francis Kramarz & David Margolis, 1999. "High Wage Workers and High Wage Firms," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00353892, HAL.
  3. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
  4. Katharine G. Abraham & Henry S. Farber, 1986. "Job Duration, Seniority and Earnings," Working papers 407, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
  6. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  7. Ann P. Bartel & George J. Borjas, 1978. "Wage Growth and Job Turnover: An Empirical Analysis," NBER Working Papers 0285, National Bureau of Economic Research, Inc.
  8. Altonji, Joseph G & Shakotko, Robert A, 1987. "Do Wages Rise with Job Seniority?," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 437-59, July.
  9. Gruetter, Max & Lalive, Rafael, 2009. "The importance of firms in wage determination," Labour Economics, Elsevier, vol. 16(2), pages 149-160, April.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  11. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
  12. Sattinger, Michael, 1995. "Search and the Efficient Assignment of Workers to Jobs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 283-302, May.
  13. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Andrews, Martyn & Schank, Thorsten & Upward, Richard, 2004. "Practical estimation methods for linked employer-employee data," IAB Discussion Paper 200403, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  15. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  16. Henry S. Farber & Robert Gibbons, 1994. "Learning and Wage Dynamics," Working Papers 707, Princeton University, Department of Economics, Industrial Relations Section..
  17. Abowd, John M. & Kramarz, Francis, 1999. "Econometric analyses of linked employer-employee data," Labour Economics, Elsevier, vol. 6(1), pages 53-74, March.
  18. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium wage dispersion with worker and employer heterogeneity," Sciences Po publications info:hdl:2441/dc0ckec3fcb, Sciences Po.
  19. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  20. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 315-33, July.
  21. repec:inr:wpaper:155908 is not listed on IDEAS
  22. Lee A. LILLARD, 1999. "Job Turnover Heterogeneity and Person-Job-Specific Time-Series Wages," Annales d'Economie et de Statistique, ENSAE, issue 55-56, pages 183-210.
  23. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  24. 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.
  25. Robert H. Topel & Michael P. Ward, 1988. "Job Mobility and the Careers of Young Men," NBER Working Papers 2649, National Bureau of Economic Research, Inc.
  26. K. Newey, Whitney, 1985. "Generalized method of moments specification testing," Journal of Econometrics, Elsevier, vol. 29(3), pages 229-256, September.
  27. John M. Abowd & Paul A. Lengermann & Kevin L. McKinney, 2002. "The Measurement of Human Capital in the U.S. Economy," Longitudinal Employer-Household Dynamics Technical Papers 2002-09, Center for Economic Studies, U.S. Census Bureau, revised Mar 2003.
  28. Shimer Robert & Smith Lones, 2001. "Matching, Search, and Heterogeneity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-18, April.
  29. Jacob Mincer & Boyan Jovanovic, 1979. "Labor Mobility and Wages," NBER Working Papers 0357, National Bureau of Economic Research, Inc.
  30. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
  31. Goux, Dominique & Maurin, Eric, 1999. "Persistence of Interindustry Wage Differentials: A Reexamination Using Matched Worker-Firm Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 492-533, July.
  32. Gautier, Pieter A, 2002. "Unemployment and Search Externalities in a Model with Heterogeneous Jobs and Workers," Economica, London School of Economics and Political Science, vol. 69(273), pages 21-40, February.
  33. John Abowd & Francis Kramarz & Paul Lengermann & Kevin McKinney & Sébastien Roux, 2012. "Persistent inter‐industry wage differences: rent sharing and opportunity costs," IZA Journal of Labor Economics, Springer, vol. 1(1), pages 1-25, December.
  34. Stern, Steven, 1990. "The Effects of Firm Optimizing Behaviour in Matching Models," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 647-60, October.
  35. James Albrecht & Susan Vroman, 2002. "A Matching Model with Endogenous Skill Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February.
  36. 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.
  37. Flinn, Christopher J, 1986. "Wages and Job Mobility of Young Workers," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S88-S110, June.
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