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 four contributions to the measurement of sorting. First, we introduce a 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. Third, we propose an alternative method to detect sorting that is immune from this bias. Finally, we apply both methods to a Brazilian matched employer-employee dataset, RAIS. We confirm the absence of sorting when using the first method, but the second method reveals strong sorting. According to the model, these two apparently contradictory empirical findings suggest that sorting is widespread in the labor market, and complementarities are important in production.