Worker-firm Matches Research Articles

Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution

It is well known that unless worker-firm match quality is controlled for, reduced-form estimates of returns to firm tenure will be biased. In this paper, we show that there is a further pervasive source of bias, namely, the comovement of firm employment and firm wages. We argue that firm-year fixed effects must be used to eliminate this bias. Estimates from two large-panel data sets from Germany and Portugal show that the bias is empirically important. Finally, we show that the results extend to tenure correlates used in macroeconomics, such as the minimum unemployment rate since joining the firm.

Strategy-Proofness of Worker-Optimal Matching with Continuously Transferable Utility

We give a direct proof of one-sided strategy-proofness for worker-firm matching under continuously transferable utility. A new “Lone Wolf” theorem (Jagadeesan et al. (2017)) for settings with transferable utility allows us to adapt the method of proving one-sided strategy-proofness that is typically used in settings with discrete transfers.

A Simple Method to Estimate Large Fixed Effects Models Applied to Wage Determinants and Matching

Models with high dimensional sets of fixed effects are frequently used to examine, among others, linked employer-employee data, student outcomes and migration. Estimating these models is computationally difficult, so simplifying assumptions that cause bias are often invoked to make computation feasible and specification tests are rarely conducted. I present a simple method to estimate large two-way fixed effects (TWFE) and worker-firm match effect models without additional assumptions. It computes the exact OLS solution including estimates of the fixed effects and makes testing feasible even with multi-way clustered errors. An application using German linked employer-employee data illustrates the advantages: The data reject the assumptions of simpler estimators and omitting match effects biases estimates including the returns to experience and the gender wage gap. Specification test detect both problems. Firm fixed effects, not match effects, are the main channel through which job transitions drive wage dynamics, which underlines the importance of firm heterogeneity for labor market dynamics.

Worker-firm matching and the parenthood pay gap: Evidence from linked employer-employee data

The parenthood pay gap is not fully explained by human capital depreciation and unobserved heterogeneity. Endogenous worker-firm matching could also account for such wage differences. This hypothesis is tested thanks to linked employer-employee data on the French private sector between 1995 and 2011. Childbirth penalties are estimated for women and for men from hourly wage equations including firm- and worker-fixed effects on top of usual measures of human capital. Though worker-firm matching explains none of the motherhood wage penalty, it plays a role in the case of fathers who do not experience any wage loss after childbirth, but do not enjoy any premium either; there is evidence of an erosion of this premium since the end of the 1990s. In a counterfactual where women do not incur any penalty after childbirth, the gender gap still amounts to 2/3 of the one that currently prevails.

Understanding Declining Fluidity in the U.S. Labor Market

We document a clear downward trend in labor market fluidity that is common across a variety of measures of worker and job turnover. This trend dates to at least the early 1980s if not somewhat earlier. Next we pull together evidence on a variety of hypotheses that might explain this downward trend. It is only partly related to population demographics and is not due to the secular shift in industrial composition. Moreover, the decline in labor market fluidity seems unlikely to have been caused by an improvement in worker-firm matching, the formalization of hiring practices, or an increase in land use regulation or other regulations. Plausible avenues for further exploration include changes in the worker-firm relationship, particularly with regard to compensation adjustment; changes in firm characteristics such as firm size and age; and a decline in social trust, which may have increased the cost of job search or made both parties in the hiring process more risk averse.

Understanding Declining Fluidity in the U.S. Labor Market

We document a clear downward trend in labor market fluidity that is common across a variety of measures of worker and job turnover. This trend dates to at least the early 1980s if not somewhat earlier. Next we pull together evidence on a variety of hypotheses that might explain this downward trend. It is only partly related to population demographics and is not due to the secular shift in industrial composition. Moreover, the decline in labor market fluidity seems unlikely to have been caused by an improvement in worker-firm matching, the formalization of hiring practices, or an increase in land use regulation or other regulations. Plausible avenues for further exploration include changes in the worker-firm relationship, particularly with regard to compensation adjustment; changes in firm characteristics such as firm size and age; and a decline in social trust, which may have increased the cost of job search or made both parties in the hiring process more risk averse.

A Simple Method to Estimate Large Fixed Effects Models Applied to Wage Determinants and Matching

Models with high dimensional sets of fixed effects are frequently used to examine, among others, linked employer-employee data, student outcomes and migration. Estimating these models is computationally difficult, so simplifying assumptions that cause bias are often invoked to make computation feasible and specification tests are rarely conducted. I present a simple method to estimate large two-way fixed effects (TWFE) and worker-firm match effect models without additional assumptions. It computes the exact OLS solution including estimates of the fixed effects and makes testing feasible even with multi-way clustered errors. An application using German linked employer-employee data illustrates the advantages: The data reject the assumptions of simpler estimators and omitting match effects biases estimates including the returns to experience and the gender wage gap. Specification test detect both problems. Firm fixed effects, not match effects, are the main channel through which job transitions drive wage dynamics, which underlines the importance of firm heterogeneity for labor market dynamics.

Directed search over the life cycle

We develop a life-cycle model of the labor market in which different worker–firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it predicts quite well the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.

Decomposing the Wage Losses of Displaced Workers: The Role of the Reallocation of Workers into Firms and Job Titles

Using an unusually rich matched employer-employee-job title data set for Portugal, this paper evaluates the sources of wage losses of workers displaced due to firm closure based on the comparison of workers' wages differentials before and after displacement. Potential wage losses of displaced workers can be related to firm, job title, and match heterogeneity in the pre- and post-displacement jobs. In this vein, we estimate a three-way high-dimensional fixed effects regression model that enables us to decompose the sources of the wage losses into the contribution of firm, job title, and match fixed effects. The worker-firm match plays a very sizable role. We found that the allocation of workers into poorer matches accounts for 38 percent of the total average wage loss. Sorting among firms accounts for 36 percent. Job downgrading also plays a significant role in explaining the wage loss of displaced workers, accounting for the remaining 26 percent.

Manager Impartiality: Worker-Firm Matching and the Gender Wage Gap

Using a rich matched employer-employee data set from Sweden, the author examines whether female managers in a firm narrow the gender pay gap. The study's main contribution is its ability to account for unobserved heterogeneity among both workers and firms that is potentially correlated with manager gender. The results show a substantial negative association between the representation of female managers and the establishment's gender wage gap. Estimates that account for sorting on unobserved worker skills, however, do not support the conclusion that managers favor same-sex workers in wage setting. Additional results show that organizations with more female managers recruit more nonmanagerial, high-wage women. Together these findings suggest that associations between manager gender and male-female wage gaps should be interpreted with caution, as worker sorting seems to be a crucial component behind this relationship.

Wage Effects of Trade Reform with Endogenous Worker Mobility

In this paper, we use a linked employer–employee database from Brazil to evaluate the wage effects of trade reform. With an aggregate (firm-level) analysis of this question, we find that a decline in trade protection is associated with an increase in average wages in exporting firms relative to domestic firms, consistent with earlier studies. However, using disaggregated, employer–employee level data, and allowing for the endogenous assignment of workers to firms due to match-specific productivity, we find that the premium paid to workers at exporting firms is economically and statistically insignificant, as is the differential impact of trade openness on the wages of workers at exporting firms relative to otherwise identical workers at domestic firms. We also find that workforce composition improves systematically in exporting firms, in terms of the combination of worker ability and the quality of worker–firm matches, post-liberalization. These results stand in stark contrast to the findings reported in many earlier studies and underscore the importance of endogenous matching and, more generally, non-random labor market allocation mechanisms, in determining the effects of trade policy changes on wages.

The Supply of Skills in the Labor Force and Aggregate Output Volatility

The cyclical volatility of U.S. gross domestic product suddenly declined during the early 1980's and remained low for over 20 years. I develop a labor search model with worker heterogeneity and match-specific costs to show how an increase in the supply of high-skill workers can contribute to a decrease in aggregate output volatility. In the model, firms react to changes in the distribution of skills by creating jobs designed specifically for high-skill workers. The new worker-firm matches are more profitable and less likely to break apart due to productivity shocks. Aggregate output volatility falls because the labor market stabilizes on the extensive margin. In a simple calibration exercise, the labor market based mechanism generates a substantial portion of the observed reduction in output volatility.

Match Quality, Worker Productivity, and Worker Mobility: Direct Evidence from Teachers

Abstract I investigate the importance of the match between teachers and schools for student achievement. I show that teacher effectiveness increases after a move to a different school and estimate teacher-school match effects. Match quality explains away a quarter of and has two-thirds the explanatory power of teacher quality. Match quality is negatively correlated with school switching, is unrelated to exit, and increases with experience. This paper provides the first estimates of worker-firm match quality using output data, as opposed to inferring productivity from wages or employment durations. The results suggest that workers seek high-quality matches for reasons other than higher pay.

The Macrodynamics of Sorting between Workers and Firms

We develop an equilibrium model of on-the-job search with ex ante heterogeneous workers and firms, aggregate uncertainty, and vacancy creation. The model produces rich dynamics in which the distributions of unemployed workers, vacancies, and worker-firm matches evolve stochastically over time. We prove that the surplus function, which fully characterizes the match value and the mobility decision of workers, does not depend on these distributions. This result means the model is tractable and can be estimated. We illustrate the quantitative implications of the model by fitting to US aggregate labor market data from 1951–2012. The model has rich implications for the cyclical dynamics of the distribution of skills of the unemployed, the distribution of types of vacancies posted, and sorting between heterogeneous workers and firms. (JEL E24, E32, J24, J63, J64)

Publicizing Performance

In most employment relationships, the employee's performance at the firm is privately, not publicly, observed. Firms can reward successful employees by publicizing their abilities, for example, via a job title, a glowing letter of recommendation, or a resume-worthy award. Firms that establish reputations for hiring young workers and promoting those who succeed lose good workers to competitors but can pay less to young, inexperienced workers in exchange. We find in a general equilibrium setting that firms with reputations for publicizing performance are able to pay less to employees at every level of tenure and thus earn economic profit, but that these firms will never be the most productive in the economy. For such equilibria to exist, the worker–firm match must be important, suggesting that this practice takes place only in human-capital-intensive industries. This paper was accepted by Wei Xiong, finance.

Place Based Policies with Unemployment

Many countries have policies aimed at creating jobs in depressed areas with high unemployment rates. In standard spatial equilibrium models with perfectly competitive labor and land markets, local job creation efforts are distortionary. We develop a stylized model of frictional local labor markets with the goal of studying the efficiency of unemployment differences across areas and the potential for place based policies to correct local market failures. Our model builds on the heavily studied Diamond - Mortensen - Pissarides framework, adapted to a local labor market setting with a competitive housing market. The result is a simple search analogue of the classic Roback (1982) model that provides a tractable environment for studying the effects of local job creation efforts. In the model, workers are perfectly mobile and the productivity of worker-firm matches may vary across metropolitan areas. In equilibrium, higher local productivity results in higher nominal wages, higher housing costs, and lower unemployment rates. Although workers can move freely to arbitrage away differences in expected utility across metropolitan areas, equilibrium unemployment rates are not equalized across space. We find that if hiring costs are excessive, firms may post too few vacancies. This problem may be offset via local hiring subsidies of the sort found in many place based policies. The optimal hiring subsidy is city specific in the sense that it depends upon the local productivity level.

The supply of skills in the labor force and aggregate output volatility

The cyclical volatility of US gross domestic product suddenly declined during the early 1980s and remained low for over 20 years. I develop a labor search model with worker heterogeneity and match-specific costs to show how an increase in the supply of high-skill workers can contribute to a decrease in aggregate output volatility. In the model, firms react to changes in the distribution of skills by creating jobs designed specifically for high-skill workers. The new worker–firm matches are more profitable and less likely to break apart due to productivity shocks. Aggregate output volatility falls because the labor market stabilizes on the extensive margin. In a simple calibration exercise, the labor market based mechanism generates a substantial portion of the observed changes in output volatility.

Liberalized Trade and Worker-Firm Matching

Recent theoretical analysis suggests that a reduction in the cost of exporting increases the degree of assortative matching between workers and firms in export-oriented industries. Changes that reduce the cost of imports have an ambiguous impact on matching. We combine detailed Swedish matched worker-firm data from 1995-2005 with tariff data to test these hypotheses. The data cover 94 sectors subject to international competition and include all firms with at least 20 employees. Our findings strongly support the theoretical predictions.

Directed Search Over the Life Cycle

We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between employment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.

Liberalized Trade and Worker-Firm Matching

Recent theoretical analysis suggests that a reduction in the cost of exporting increases the degree of assortative matching between workers and firms in export-oriented industries. Changes that reduce the cost of imports have an ambiguous impact on matching. We combine detailed Swedish matched worker-firm data from 1995-2005 with tariff data to test these hypotheses. The data cover 94 sectors subject to international competition and includes all firms with at least 20 employees. Our findings strongly support the theoretical predictions.