An Empirical Model of Wage Dispersion with Sorting

54 Pages Posted: 14 Apr 2014 Last revised: 27 Mar 2022

See all articles by Jesper Bagger

Jesper Bagger

University of London, Royal Holloway College - Department of Economics

Rasmus Lentz

University of Wisconsin - Madison

Date Written: April 2014

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%.

Suggested Citation

Bagger, Jesper and Lentz, Rasmus, An Empirical Model of Wage Dispersion with Sorting (April 2014). NBER Working Paper No. w20031, Available at SSRN: https://ssrn.com/abstract=2424602

Jesper Bagger (Contact Author)

University of London, Royal Holloway College - Department of Economics ( email )

Royal Holloway College
Egham
Surrey, Surrey TW20 0EX
United Kingdom

Rasmus Lentz

University of Wisconsin - Madison ( email )

Department of Economics
1180 Observatory Drive
Madison, WI 53706-1393
United States