An Empirical Model of Wage Dispersion with Sorting

Jesper Bagger () and Rasmus Lenz
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Jesper Bagger: Royal Holloway, University of London, Postal: Egham Hill, Egham, Surrey TW20 0EX, UK
Rasmus Lenz: University of Wisconsin-Maddison

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

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%.

Keywords: Sorting; Worker heterogeneity; Firm heterogeneity; On-the-job search; Wage dispersion; Matched employer-employee data (search for similar items in EconPapers)
JEL-codes: J24 J33 J62 J63 J64 (search for similar items in EconPapers)
Pages: 53
Date: 2014-04-01
New Economics Papers: this item is included in nep-dge, nep-ger, nep-hrm, nep-lab and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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