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

Abstract

The present note evaluates the performance of firm fixed effects as a productivity measure when identified from wage regressions with two‐way fixed effects in matched employer‐employee data. This setting is frequently applied to study the matching between workers and firms. Exploiting wage and production data from a large administrative German data set, I find that the correlation between firm fixed effects (FFE) and total factor productivity is close to zero. Once TFP is used, the matching pattern is positive assortative, whereas the two‐way fixed effect technique yields the opposite result.

Training, Wages and a Missing School Graduation Cohort

“…The evidence on Germany is also mixed. While some previous studies conclude negative sorting to be apparent(Andrews et al 2007(Andrews et al , 2012, more recent studies byCard et al (2013) andEhrl (2019) provide evidence of positive assortative matching.…”

“…Further robustness tests controlling for time trend support this conclusion.18 This would assume positive sorting of workers into firms. The empirical literature has not yet reached consensus on whether positive or negative sorting exists(Abowd et al 1999, Andrews et al 2008, Eeckhout and Kircher 2011, Andrews et al 2012, Card et al 2013and Ehrl 2019. The evidence on Germany is also mixed.…”