Wage Dispersion with Heterogeneous Firm Technologies and Worker Abilities: An Equilibrium Job Search Model for Matched Employer-Employee Data

An equilibrium job search model with on-the-job-search is presented and solved, in which we allow firms to implement optimal wage posting strategies in the sense that they leave no rent to their employees and counter the offers received by their employees from competing firms. Unobserved worker productive heterogeneity is introduced in the form of cross-worker differences in a `competence' parameter. On the other side of the market, firms also are heterogeneous with respect to their (observable) marginal productivity of labor. The theoretical model can be solved in closed-form and typically delivers a hump-shaped aggregate earnings distribution that reflects both firm- and worker-heterogeneity. The fit to the observed earnings distributions is very good. The model also fits the observed distributions of firm sizes in the populations of workers and firms. Finally, it delivers both between- and within-firm endogenous wage dispersion. The structural model is estimated using matched employer and employee French panel data. Its fit to the data is good. We then use the results for two applications. The first one is a decomposition of the log-wage means and variances into additive firm and person effects. We find that the share explained by the person effect varies across skill groups, and is generally much smaller than what was found in previous analyses of the same panel. Specifically, this share lies close to 50% for high-skilled white collars, and quickly decreases to 0% as the observed skill level decreases. The second application is a look at the anatomy of the `matching technology'. We find evidence of nonmonotonic relationships between firm sizes, productivities and recruiting efforts.