Econometrica: Jan 2017, Volume 85, Issue 1

Identifying Equilibrium Models of Labor Market Sorting

https://doi.org/10.3982/ECTA11301
p. 29-65

Marcus Hagedorn, Tzuo Hann Law, Iourii Manovskii

We assess the empirical content of equilibrium models of labor market sorting based on unobserved (to economists) characteristics. In particular, we show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker, 1973 with search frictions can be nonparametrically identified using only matched employer–employee data on wages and labor market transitions. In particular, these data are sufficient to nonparametrically estimate the output of any individual worker with any given firm. Our identification proof is constructive and we provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we add on‐the‐job search to the model, extend the identification strategy, and apply it to a large German matched employer–employee data set to describe detailed patterns of sorting and properties of the production function.

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Supplement to "Identifying Equilibrium Models of Labor Market Sorting"

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Supplement to "Identifying Equilibrium Models of Labor Market Sorting"

The Supplement contains most formal proofs and derivations (Section A), detailed description of implementation strategy and computational algorithms (Sections B and C), complete specification of the model with on-the-job search and the identification proof for this model (Section D), details of empirical analysis using large German matched employer-employee data (Section E) and figures describing Monte-Carlo results for the benchmark model and various alternative specifications (Section F).

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