June 2012

IZA DP No. 6662: High Wage Workers Match with High Wage Firms: Clear Evidence of the Effects of Limited Mobility Bias

published in: Economics Letters, 2012, 117 (3), 824-827

Positive assortative matching implies that high productivity workers and firms match together. However, there is almost no evidence of a positive correlation between the worker and firm contributions in two-way fixed-effects wage equations. This could be the result of a bias caused by standard estimation error. Using German social security records we show that the effect of this bias is substantial in samples with limited inter-firm movement. The correlation between worker and firm contributions to wage equations is unambiguously positive.