A Formal Test of Assortative Matching in the Labor Market
John M. Abowd
Cornell University Department of Economics; Labor Dynamics Institute; School of Industrial and Labor Relations; National Bureau of Economic Research (NBER); CREST; Institute for the Study of Labor (IZA)
National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)
European Central Bank (ECB); National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
November 1, 2009
US Census Bureau Center for Economic Studies Paper No. CES-WP- 09-40
We estimate a structural model of job assignment in the presence of coordination frictions due to Shimer (2005). The coordination friction model places restrictions on the joint distribution of worker and firm effects from a linear decomposition of log labor earnings. These restrictions permit estimation of the unobservable ability and productivity differences between workers and their employers as well as the way workers sort into jobs on the basis of these unobservable factors. The estimation is performed on matched employer-employee data from the LEHD program of the U.S. Census Bureau. The estimated correlation between worker and firm effects from the earnings decomposition is close to zero, a finding that is often interpreted as evidence that there is no sorting by comparative advantage in the labor market. Our estimates suggest that this finding actually results from a lack of sufficient heterogeneity in the workforce and available jobs. Workers do sort into jobs on the basis of productive differences, but the effects of sorting are not visible because of the composition of workers and employers.
Number of Pages in PDF File: 40
JEL Classification: J31, J21, E24working papers series
Date posted: December 1, 2009
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