published in: Labour Economics, 2010, 17 (6), 875-885
Labor market theories allowing for search frictions make marked predictions on the effect of
the degree of frictions on wages. Often, the effect is predicted to be negative. Despite the
popularity of these theories, this has never been tested. We perform tests with matched
worker-firm data. The worker data are informative on individual wages and labor market
transitions, and this allows for estimation of the degree of search frictions. The firm data are
informative on labor productivity. The matched data provide the skill composition in different
markets. Together this allows us to investigate how the mean difference between labor
productivity and wages in a market depends on the degree of frictions and other
determinants. We correct for worker self-selection into high-wage jobs. Using within-market
variation, we also investigate the extent of (and explanations for) positive assortative
matching.
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