CREAT: Census Research Exploration and Analysis Tool

Agent Heterogeneity and Learning: An Application to Labor Markets

October 2002

Written by: Simon Woodcock

Working Paper Number:

tp-2002-20

Abstract

I develop a matching model with heterogeneous workers, rms, and worker-firm matches, and apply it to longitudinal linked data on employers and employees. Workers vary in their marginal product when employed and their value of leisure when unemployed. Firms vary in their marginal product and cost of maintaining a vacancy. The marginal product of a worker-firm match also depends on a match-specific interaction between worker and rm that I call match quality. Agents have complete information about worker and rm heterogeneity, and symmetric but incomplete information about match quality. They learn its value slowly by observing production outcomes. There are two key results. First, under a Nash bargain, the equilibrium wage is linear in a person-specific component, a firm-specific component, and the posterior mean of beliefs about match quality. Second, in each period the separation decision depends only on the posterior mean of beliefs and person and rm characteristics. These results have several implications for an empirical model of earnings with person and rm e ects. The rst implies that residuals within a worker-firm match are a martingale; the second implies the distribution of earnings is truncated. I test predictions from the matching model using data from the Longitudinal Employer-Household Dynamics (LEHD) Program at the US Census Bureau. I present both xed and mixed model specifications of the equilibrium wage function, taking account of structural aspects implied by the learning process. In the most general specification, earnings residuals have a completely unstructured covariance within a worker-firm match. I estimate and test a variety of more parsimonious error structures, including the martingale structure implied by the learning process. I nd considerable support for the matching model in these data.

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economist, econometric, estimating, employ, employed, labor, longitudinal, endogenous, job, heterogeneity, employment estimates, tenure, hiring, employing, econometrician, educated, census bureau, wage data, employer household, longitudinal employer, research census, labor markets, employee data, unemployed

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Standard Industrial Classification, National Science Foundation, Ordinary Least Squares, American Immigration Council, Current Population Survey, Decennial Census, Employer Identification Numbers, Survey of Income and Program Participation, Cornell University, Council of Economic Advisers, National Institute on Aging, Alfred P Sloan Foundation, Longitudinal Employer Household Dynamics, Protected Identification Key, CDF

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