Identifying Equilibrium Models of Labor Market Sorting

Abstract

Does the market allocate the right workers to the right jobs? Since observable (to economists) variables account for only a small fraction of the wage variance in the data, to answer this question it is essential to study assortative matching between employers and employees based on their unobserved characteristics. This paper enables this line of research. We show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker (1973) with search frictions can be identified using only matched employer-employee data on wages and labor market transitions. In particular, these data are sufficient to assess whether matching between workers and firms is assortative, whether sorting is positive or negative, and to measure the potential effect on output from moving any given worker to any given employer in the economy. We provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we extend our identification and implementation strategies to the commonly used class of models of sorting based on comparative advantage and provide a test that discriminates between these models.

A Distributional Framework for Matched Employer Employee Data

“…2 Many structural models proposed in the literature build on Becker (1973). Examples are Lopes de Melo (2018), Lise, Meghir, and Robin (2016), Bagger and Lentz (2014), Hagedorn, Law, and Manovskii (2017), and Lamadon, Lise, Meghir, and Robin (2013). per firm tends to be small, which creates an incidental parameter bias in estimation. 3 In such environments, reducing the number of classes can alleviate small-sample biases.…”

On the Use of Firm Fixed Effects as a Productivity Measure for Analyzing Labor Market Matching

“…Most of the papers that analyse matching in Germany focus exclusively on West Germany, see Alda et al (2009), Card et al (2013 or Hagedorn et al (2017). Even though Destefanis and Fonseca (2007) estimate matching efficiency exploiting the relation between the unemployment and the vacancy rate, the authors find significant differences between the North and the South of Italy.…”

“…Some recent structural approaches, such asHagedorn et al (2017), seek to estimate both workers' and vacancies' productivities in a unified framework Bagger and Lentz (2014). andLise et al (2016) adopt on-the-job search and derive productivity proxies from observed worker flows between firms Bartolucci et al (2015).…”

The Econometrics of Shape Restrictions

“…However, as noted by Eeckhout and Kircher (2011), these fixed effects need not be connected to the underlying firm and worker types. Hagedorn et al (2017) proposed an estimator of F , but its asymptotic properties are unknown. To our knowledge, no test of PAM or supermodularity of F is available.…”