Firm Dynamics and Assortative Matching

60 Pages Posted: 11 Jun 2014

See all articles by Leland Dod Crane

Leland Dod Crane

Board of Governors of the Federal Reserve System

Date Written: May 1, 2014

Abstract

I study the relationship between firm growth and the characteristics of newly hired workers. Using Census microdata I obtain a novel empirical result: when a given firm grows faster it hires workers with higher past wages. These results suggest that productive, fast-growing firms tend to hire more productive workers, a form of positive assortative matching. This contrasts with prior research that has found negligible or negative sorting between workers and firms. I present evidence that this difference arises because previous studies have focused on cross-sectional comparisons across firms and industries, while my results condition on firm characteristics (e.g. size, industry, or firm fixed effects). Motivated by the empirical findings I develop a search model with heterogeneous workers and firms. The model is the first to study worker-firm sorting in an environment with worker heterogeneity, firm productivity shocks, multi-worker firms, and search frictions. Despite this richness the model is tractable, allowing me to characterize assortative matching, compositional dynamics and other properties analytically. I show that the model reproduces the positive firm growth-quality of hires correlation when worker and firm types are strong complements in production (i.e. the production function is strictly log-supermodular).

Keywords: Assortative Matching, Firm Growth, Wages, Unemployment, Vacancies

JEL Classification: E24, J31, J63, J64

Suggested Citation

Crane, Leland Dod, Firm Dynamics and Assortative Matching (May 1, 2014). US Census Bureau Center for Economic Studies Paper No. CES-WP-14-25, Available at SSRN: https://ssrn.com/abstract=2448277 or http://dx.doi.org/10.2139/ssrn.2448277

Leland Dod Crane (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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