COMPLEMENTS

Identifying the sign and strength of complements in production

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 Obiettivo del progetto (Objective)

'Are better workers employed in more productive jobs? Understanding Assortative Matching is key for evaluating efficient allocation of workers to firms. We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching between worker and firm types is Positive or Negative, i.e. whether there are complements or substitutes in technology. In standard competitive matching models the wages are determined by the marginal contribution of a worker, and the marginal contribution might be higher or lower for low productivity firms depending on the production function. For every production function that induces positive assortative matching we can find a production function that induces negative sorting but generates identical wages. This arises even when we allow for non-competitive mismatch, for example due to search frictions. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e., the magnitude of the cross-partial, and the associated loss in output. While we show analytically that standard fixed effects regressions are not suitable to recover the strength of sorting, we propose an alternative procedure that measures the strength of sorting in the presence of search frictions independent of the sign of the sorting. Finally, this problem is challenging because the identification is based on wage data alone. We therefore also propose a flexible production function that derives the productivity of individual jobs from the firm's aggregate profits.'

Introduzione (Teaser)

Your daily wages are not an indication of your true value to your company. Researchers have developed a new method of calculating your true worth on the job.

Descrizione progetto (Article)

Researchers have studied and analysed job productivity and worker ability. Theory indicates that if these are optimised then better workers are employed at the best firms in their field. To illustrate this notion, a top lawyer would work for a top law firm.

According to the outcome of the EU-funded project 'Identifying the sign and strength of complements in production' (COMPLEMENTS), this does not happen. Explored first was the notion that wage is an important determinant of whether the job and employee are at an optimal match. The key insight was that the wage offered to a worker is not the most important factor. It seems a worker can be offered a higher salary at a lesser ranked company and be enticed to take the job. Thus, wage is only one factor and not an ultimate measure of the optimal relationship.

The results from this research show a better measurement to be when a worker changes jobs. Researchers found other factors such as time and energy for a new search and change in wage to be better measurements.

Profitability by employee was the second choice for answering the question 'Are better workers employed by more productive firms?' The researchers looked for answers here but concluded that individual jobs are team efforts and not measurable at an individual profit level.

COMPLEMENTS formulated a new theory of production that allows for attribution of the profits to jobs from firm-level profit and wages.