This paper studies multidimensional matching between workers and jobs. Workers differ in manual and cognitive skills and sort into jobs that demand different combinations of these two skills. To study this multidimensional sorting, I develop a theoretical framework that generalizes the unidimensional notion of assortative matching. I derive the equilibrium in closed form and use this explicit solution to study biased technological change. The key finding is that an increase in worker-job complementarities in cognitive relative to manual inputs leads to more pronounced sorting and wage inequality across cognitive relative to manual skills. This can trigger wage polarization and boost aggregate wage dispersion. I then estimate the model for the US and identify sizeable technology shifts: during the last two decades, worker-job complementarities in cognitive inputs strongly increased whereas complementarities in manual inputs decreased. In addition to this bias in complementarities, there has also been a cognitive skill-bias in production. Counterfactual exercises suggest that these technology shifts can account for observed changes in worker-job sorting, wage polarization and a significant part of the increase in US wage dispersion.

We develop a theory that links individuals’ network structure to their productivity and earnings. While a higher degree leads to better access to information, more clustering leads to higher peer pressure. Both information and peer pressure affect effort in a model of team production, with each being beneficial in a different environment. We find that information is particularly valuable under high uncertainty, whereas peer pressure is more valuable in the opposite case. We apply our theory to gender disparities in performance. We document the novel fact that men establish more connections (a higher degree) whereas women possess denser networks (a higher clustering coefficient). We therefore expect men to outperform women in jobs that are characterised by high uncertainty in project outcomes and earnings. We provide suggestive evidence that supports our predictions.

The labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We propose a theory in which the search behavior of the employed has profound aggregate implications for the unemployed. There is a strategic complementarity between active on-the-job search and vacancy posting by firms, which leads to multiple equilibria: in the presence of sorting, active on-the-job search improves the quality of the pool of searchers. This encourages vacancy posting, which in turn makes costly on-thejob search more attractive—a self-fulfilling equilibrium. The model provides a rationale for the Jobless Recovery, the outward shift of the Beveridge curve during the boom and for pro-cyclical frictional wage dispersion. Central to the model’s mechanism is the fact that the employed crowd out the unemployed when on-the-job search picks up during recovery. We also illustrate this mechanism in a stylized calibration exercise. (JEL E24, E32, J63, J64)

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