Using Firm Data to assess the Performance of Equilibrium Search Models of the Labor Market

Equilibrium search models are useful tools for the evaluation of labor market policies. Recently developed equilibrium search models of the labor market are able to fit the wage distribution perfectly with longitudinal labor supply data, by estimating an appropriate distribution of labor productivity across firms. This paper formally compares such structural estimates to their directly observed counterparts in firm data. More generally, we investigate the extent to which these models are able to explain the observed distributions of wages, productivities and firm sizes across firms, as well as the extent to which they are able to explain the observed relationships between these variables across firms. The parameters that capture search frictions are estimated with worker data that are matched to the firm data.