Identifying Sorting in Practice

Abstract

Eeckhout and Kircher (2011) argue that using wage data alone, it is virtually impossible to identify whether assortative matching between worker and firm types is positive or negative. This paper proposes to use workers mobility to identify the sign of assortative matching. In order to understand the nature of sorting, we directly analyze the matching process between firms and workers. In the absence of assortative matching we should observe that the probability that workers leave a firm to go to a firm of different quality is independent of the worker type. In the presence of positive (negative) assortative matching we should observe that good workers are more (less) likely to move to better firms than bad workers. We only assume that agents’ payoffs are partially monotone on their types, which allows us to use within firm variation on wages to order workers. While we index the quality of the firm by its profits. We use a matched data set that combines administrative earnings records for individual employees with detailed balance sheet data for their employers in the Veneto region of Italy. We find strong evidence of positive assortative matching. Better workers are found to have higher probability to move to better firms.