An Empirical Model of Wage Dispersion with Sorting

Jesper Bagger and Rasmus Lentz

No 20031, NBER Working Papers from National Bureau of Economic Research, Inc

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%.

JEL-codes: J24 J33 J62 J63 J64 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-dge, nep-hrm and nep-lab
Note: EFG LS
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Citations: View citations in EconPapers (27)

Published as Jesper Bagger & Rasmus Lentz, 2019. "An Empirical Model of Wage Dispersion with Sorting," The Review of Economic Studies, vol 86(1), pages 153-190.

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Working Paper: An Empirical Model of Wage Dispersion with Sorting (2009)
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