Matching Between Heterogeneous Workers and Firms

No 1523, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: This paper investigates the matching patterns among agents who are heterogeneous in productivity, in a labor market characterized by frictions. Utility from matching is fully transferable. Agents have to choose which type of partners to match with. There is a possibility of multiple equilibria. The general characteristics of a matching equilibrium are reviewed. Conditions for existence of the different types of equilibria are laid out. Conditions on the production function are given, restricting the number of possible equilibria. An application is studied. It is found that wage dispersion is higher when agents match with a larger set of productivity types, also resulting in lower unemployment. Some evidence is provided to support the notion that Europe may be in the type of matching equilibrium that would result in higher unemployment and lower wage dispersion than in the U.S., as empirically observed. This emphasizes that studying the matching behavior of heterogeneous agents is an important part of the cross-country study of labor markets.

Date: 2000-08-01
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