Microeconometric search-matching models and matched employer-employee data

Abstract : The recent advent of matched employer-employee data as part of the labor market scholar’s toolbox has allowed a great deal of progress in our understanding of individual labor earnings. A growing number of empirical analyzes of available matched employer-employee data sets now combine with the already voluminous literature on empirical wage equations based on individual or household survey data to draw an ever richer picture of wage dispersion, individual wage dynamics, and the productivity-wage relationship. In this chapter we tour the empirical wage equations literature along these three lines and make a case that viewing it through the lens of structural job search models can help clarify and unify some of its recurring findings. Among other things, we emphasize and quantify the role of matching frictions in explaining the share of “residual” wage dispersion that is left unexplained by the reduced-form approach. Secondly, we quantitatively assess the importance of labor market competition between employers relative to non-competitive wage formation mechanisms (namely, wage bargaining) as a theoretical underpinning of the wage-productivity relationship. Thirdly, we show how search frictions combined with a theoretically founded wage formation rule based on renegotiation by mutual consent can account for the widely documented dynamic persistence of individual wages. We conclude with a list of questions that are open to further research.