An Empirical Model of Wage Dispersion with Sorting

Abstract

This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity. Workers differ in their permanent skill level and firms differ with respect to productivity. Positive (negative) sorting results if the match production function is supermodular (submodular). The model is estimated on Danish matched employer-employee data. We find evidence of positive assortative matching. In the estimated equilibrium match distribution, the correlation between worker skill and firm productivity is 0.12. The assortative matching has a substantial impact on wage dispersion. We decompose wage variation into four sources: Worker heterogeneity, firm heterogeneity, frictions, and sorting. Worker heterogeneity contributes 51% of the variation, firm heterogeneity contributes 11%, frictions 23%, and finally sorting contributes 15%. We measure the output loss due to mismatch by asking how much greater output would be if the estimated population of matches were perfectly positively assorted. In this case, output would increase by 7.7%.

Sorting through Search and Matching Models in Economics

“…To briefly touch on the analogous question here, Adachi (2003) assumes cloning and impatience and shows that, for a general match output function f , the set of stationary equilibria converges to the set of stable matches as frictions vanish. 39 See also the related work by Teulings and Gautier (2004), De Melo (2009), Bagger and Lentz (2014), Lamadon et al (2013), and Bartolucci and Devicienti (2013).…”

Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

“…As an example focus on those individuals who prefer job A to job B and job B to non-employment 12 Other recent papers using job-to-job transitions as a revealed preference are Sorkin (2015) and Bagger and Lentz (2015). 13 It is important to point out that this does not necessarily incorporate all forms of search frictions.…”

“…In this environment high productive firms chose to match, while low productive firms chose to post wages. 40 If there is positive assortative matching as suggested by Bagger and Lentz (2015) and Lise, Meghir, and Robin (2016) then college men would be more likely to be employed in a high productive firm which chooses to match outside offers. Distinguishing a model with both wage posting and bargaining from one with bargaining but allowing for a flexible β seems extremely difficult and as a practical manner we are not sure how to distinguish them.…”

Racial discrimination in the U.S. labor market: Employment and wage differentials by skill

“…9 There is a growing consensus in the applied search literature on the descriptive relevance of positive assortative matching (see Lise et al (2013), Lopes De Melo (2013 and Bagger and Lentz (2012)). …”

“…Shimer and Smith (2000) established the equivalence between a specific form of production complementarities and positive assortative matching in a random search environment, generalizing the famous result in a competitive setup put forth by Becker (1973). Several papers in the applied search literature have tried to measure the sign and strength of assortative matching in skill nonparametrically (see Abowd et al (1999), Eeckhout and Kircher (2011), Hagedorn et al (2012), Torres et al (2013) and Lopes De Melo (2013)), or estimate the degree of skill complementarities in production using a structural approach (see Bagger and Lentz (2012) and Lise et al (2013)). Although this question is not fully settled, there is a growing consensus that positive sorting on skill is an important characteristic of modern labor markets.…”