Sorting and Wage Inequality

Kory Kantenga
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Kory Kantenga: University of Pennsylvania

No 660, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We measure the roles of the permanent component of worker and firm produc- tivities, complementarities between them, search frictions, and equilibrium sorting in driving German wage dispersion. We do this using a standard assortative matching model with on-the-job search. The model is identified and estimated using matched employer-employee data on wages and labor market transitions without imposing para- metric restrictions on the production technology. The model’s fit to the wage data is comparable to prominent wage regressions with additive worker and firm fixed effects that use many more degrees of freedom. Moreover, we propose a direct test that rejects the restrictions underlying the additive specification. We use the model to decompose the rise in German wage dispersion between the 1990s and the 2000s. We find that changes in the production function and the induced changes in equilibrium sorting pat- terns account for virtually all the rise in the observed wage dispersion. Search frictions are an important determinant of the level of wage dispersion but have had little impact on its rise over time.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-ltv and nep-ure
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:660

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