A Structural Two-Sided Matching Model of Online Labor Markets

Abstract

In the past decade, IT has facilitated the shift from permanent employment to need-based outsourcing and from local labor market to global online labor markets. While prior studies have examined how global frictions affect employers’ hiring decisions on online labor markets, we have limited understanding of the inter-dependence between workers and employers and the economic impact of IT-enabled globalization on matching outcomes such as the number of matched projects, freelancer wages, and project values generated from matching. This study is an attempt to fill in the gap by examining the dual roles of IT-enabled globalization, i.e., (1) in determining the formation of matches between employers and freelancers, and (2) in affecting market outcomes. From a market perspective, we take into account two-sided decision making, competition on each side, complementarities between employer and freelancer attributes, and endogenous money transfers between employers and freelancers.In our empirical analysis, we estimate a structural two-sided matching model of the online labor market from a revealed preference perspective. The estimation is based on a dataset from a major freelancing website that connects freelancers and employers from more than 200 countries. We then conduct counterfactual analysis to quantify the economic impact of IT-enabled globalization in online labor market by comparing the current scenario with a counterfactual scenario where employers can only match with freelancers from the same country. The results from our estimation suggest that employers tend to match with freelancers from the same country, and that employers from developed countries tend to match with freelancers from developing countries. The results from the counterfactual analysis suggest that IT-enabled globalization leads to more employers and freelancers with successful matches, lower average wage among matched freelancers, and higher total project values generated on the market.