An Empirical Model of Wage Dispersion with Sorting

Rasmus Lentz and Jesper Bagger
Additional contact information
Rasmus Lentz: University of Wisconsin-Madison
Jesper Bagger: Royal Holloway, University of London

No 1345, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity and wage setting through bargaining with employers competing for workers' services. Workers differ in permanent skills, firms differ in productivity. Workers can respond to mismatch by searching harder for better matches; they 'create their own luck'. This mechanism may generate labor market sorting. The model is estimated on Danish matched employer-employee data. We find that high-skilled workers tend to sort into high-productive firms. Log wage variation comprises worker heterogeneity, firm heterogeneity, imperfect labor market competition, and sorting in proportions 49%, 17%, 23% and 11%. Hence, labor market sorting is a separate and significant source of dispersion. In a counterfactual economy where workers are prevented from acting on mismatch, there is no sorting, and worker heterogeneity is found to be a much weaker contributor to wage variation, and imperfect labor market competition, effectively 'luck', a much stronger contributor. Ignoring worker's search choice may thus substantially impact our understanding wage inequality.

Date: 2015
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2015/paper_1345.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1345

Access Statistics for this paper

More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().