SMU SOE Seminar Series (September 1 2025): Assortative matching and wages: The role of selection

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ABSTRACT

We develop a random search model of the labor market with two-sided heterogeneity and match-specific productivity shocks. Our model has two robust predictions: i) the average log wage that a worker receives is increasing in the worker's and employer's productivity and ii) there is positively assortative matching between high wage workers and high wage firms.  Wages and sorting are driven by the same selection force. All workers are equally likely to meet all firms, but low (high) productivity workers have a higher average surplus from meeting low (high) productivity firms. The high surplus meetings result in matches more frequently, generating positive assortative matching. Since only meetings that result in matches are observed in administrative wage data, such data contain only a selected subset of meetings, driving the result that average log wages are increasing and submodular. We show that our findings are consistent with recent results in the empirical wage literature.

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