The Importance of Two-SidedHeterogeneity for theCyclicality of Labour MarketDynamics

Using two data sets derived from German administrative data, including a linkedemployer-employee data set, we investigate the cyclicality of worker and job flows.The analysis stresses the importance of two-sided labour market heterogeneity inthis context, taking into account both observed and unobserved characteristics.We find that small firms hire mainly unemployed workers, and that they do soat the beginning of an economic expansion. Later on in the expansion, hiringsmore frequently result from direct job-to-job transitions, with employed workersmoving to larger firms. Contrary to our expectations, workers moving to largerfirms do not experience signi¯cantly larger wage gains than workers moving tosmaller establishments. Furthermore, our econometric analysis shows that theinteraction of unobserved heterogeneities on the two sides of the labour marketplays a more important role for employed job seekers than for the unemployed.