Identifying sorting: in theory

Eeckhout, Jan and Kircher, Philipp (2011) Identifying sorting: in theory. Review of Economic Studies, 78 (3). pp. 872-906. ISSN 0034-6527

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Abstract

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 re ect the opportunity cost of mismatch. We show analytically that this non-monotonicity prevents standard form fixed effects to correlate with the true type of the form. 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.

Item Type:	Article
Official URL:	http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information:	© 2011 Oxford University Press
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory; Matching Theory J - Labor and Demographic Economics > J0 - General J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J60 - General
Date Deposited:	19 Oct 2010 13:34
Last Modified:	03 Apr 2024 20:27
URI:	http://eprints.lse.ac.uk/id/eprint/29708

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