Sorting in the Labor Market: Theory and Measurement

Abstract

Are more skilled workers employed by more productive firms? Are complementarities important in production? We provide three contributions to the measurement of sorting. First, we use a standard frictional sorting model to show that the standard empirical method used to measure sorting in the labor market can be biased in favor of not detecting sorting. Second, we isolate the economic mechanism responsible for this bias. Finally, we propose an alternative method to detect sorting that is immune from this bias. According to the model, sorting is prevalent in labor markets, as measured by our alternative method, but the standard method fails to detect it. This paper was part of my dissertation. I am indebted to Giuseppe Moscarini for the extensive advice and support. I would like to thank Fabian Lange, Fabien Postel-Vinay, Björn Brügemann, Jeremy Lise and Robert Shimer for their valuable comments and help. Very useful feedback was also received from participants at the seminars at Yale, UCL,

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