Assortative Matching between workers and firms provides evidence of the complementarities or substitutes in production. The presence of complementarities is important for policies that aim to achieve the optimal allocation of resources, for example unemployment insurance. We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching is positive or negative. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e., the magnitude of the cross-partial, and the associated welfare loss. We show first that the wage for a given worker is non-monotonic in the type of his employer. This is due to the fact that in a sorting model, wages reflect the opportunity cost of mismatch. We show analytically that this non-monotonicity prevents standard firm fixed effects to correlate with the true type of the firm. We then propose an alternative procedure that measures the strength of sorting in the presence of search frictions. Knowing the strength of sorting facilitates the measurement of the output loss due to mismatch.
Identifying Sorting – In Theory
Review of Economic Studies, 2011, Vol. 78 (3), 872-906. With Jan Eeckhout.
Wage and employment data can identify the strength of sorting in search models, though two-sided fixed effects are always mis-specified.
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Journal of the European Economic Association, 2022, 20(6), 2317–2352. This paper showcases studies that illustrate the potential of analyzing online job search data and of intervening in the online job search process, and highlights conditions under which some of the recent interventions are likely to improve market outcomes overall, rather than improving only the outcomes for the treated individuals. Go to paper
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Review of Economic Studies, 2015, Vol 82 (2), 659-692. With Fane Groes and Iourii Manovskii. Occupational mobility is highest for high and low earners, and the former move “up” and the latter “down” as in models of vertical re-sorting. Go to paper
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