IZA DP No. 9411: Identifying Sorting in Practice
AEJ: Applied Economics, forthcoming
We propose a novel methodology to uncover the sorting pattern in the labor market. Our methodology exploits the additional information contained in profits, which complements the information from wages and transitions typically used in previous work. We identify the strength of sorting solely from a ranking of firms by profits. To discern the sign of sorting, we build a noisy ranking of workers from wage data. We provide a test for the sign of sorting that is consistent even with noise in worker rankings. We apply our approach to a panel data set that combines social security earnings records for workers in the Veneto region of Italy with detailed financial data for firms. We find robust evidence of positive sorting. The correlation between worker and firm types is about 52%.