Working Paper: NBER ID: w20031
Authors: Jesper Bagger; Rasmus Lentz
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%.
Keywords: No keywords provided
JEL Codes: J24; J33; J62; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| worker skill levels (J24) | wages (J31) |
| firm productivity (D22) | wages (J31) |
| worker skill levels (J24) | firm productivity (D22) |
| sorting (C69) | wage dispersion (J31) |
| firm heterogeneity (D21) | wage dispersion (J31) |
| worker heterogeneity (J29) | wage dispersion (J31) |
| frictions (D74) | wage dispersion (J31) |
| perfectly positively assorted matches (C78) | output (C67) |
| worker skill levels (J24) | sorting (C69) |
| firm productivity (D22) | sorting (C69) |