Identifying Sorting: In Theory

Jan Eeckhout and Philipp Kircher

No 4004, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: linked employer-employee data; identification; assortative matching; sorting; interpretation of fixed-effects (search for similar items in EconPapers)
JEL-codes: C78 J31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-02
New Economics Papers: this item is included in nep-bec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Published - published in: Review of Economic Studies, 2011, 78 (3), 872–906

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Related works:
Journal Article: Identifying Sorting--In Theory (2011)
Working Paper: Identifying sorting: in theory (2011)
Working Paper: Identifying Sorting - In Theory (2009)
Working Paper: Identifying Sorting, In Theory (2009)
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