Identifying Sorting: In Theory

31 Pages Posted: 2 Mar 2009

See all articles by Jan Eeckhout

Jan Eeckhout

University College London - Department of Economics

Philipp Kircher

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Abstract

We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching between worker and firm types is positive or negative. In standard competitive matching models the wages are determined by the marginal contribution of a worker, and the marginal contribution might be higher or lower for low productivity firms depending on the production function. For every production function that induces positive sorting we can find a production function that induces negative sorting but generates identical wages. This arises even when we allow for non-competitive mismatch, for example due to search frictions. 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. While we show analytically that standard fixed effects regressions are not suitable to recover the strength of sorting, we propose an alternative procedure that measures the strength of sorting in the presence of search frictions independent of the sign of the sorting.

Keywords: sorting, assortative matching, identification, linked employer-employee data, interpretation of fixed-effects

JEL Classification: J31, C78

Suggested Citation

Eeckhout, Jan and Kircher, Philipp, Identifying Sorting: In Theory. IZA Discussion Paper No. 4004, Available at SSRN: https://ssrn.com/abstract=1351168 or http://dx.doi.org/10.2139/ssrn.1351168

Jan Eeckhout (Contact Author)

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom

Philipp Kircher

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6777 (Phone)
215-573-2057 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
84
Abstract Views
899
Rank
284,996
PlumX Metrics