Final Report Summary - SORTING (The Role of Sorting for Estimation, Market Design and Development) More able and skilled workers are more productive: by any measurable standard, they produce more and they earn higher wages. But are the same workers also more productive if the are surrounded by other more able and skilled co-workers? Casual observation of how much effort and resources are spent to put together the most appropriate teams of professionals seems to indicate the exact composition of collaborators matters a great deal. The most reputable hospitals vie for the best doctors, the best law firms make the best lawyers partner and top universities attract the best researchers. Yet, economist have found no evidence of such complementary effects economy-wide. Using social security data, wages are decomposed in a component due to the individual worker and one due to the characteristics of the firm environment. It turns out there is no significant correlation between these two components, and hence there is no evidence of those complementary effects. The main contribution of the research conducted during this grant is to show that the lack of evidence is due to a bias in the method. The key insight is that while working in a better firm does make all workers more productive, it does not necessarily increase wages. In fact, wages could be lower when getting a job in a better firm even if that worker is producing more output. This is due to mismatch, the fact that the better firm ideally would like to fill that position with a more skilled worker. For the firm to be willing to offer the job to one of lower ability, they will offer a lower wage. It is precisely this wage decrease that leads to failure to find evidence of the complementarities. They propose a method that takes this into account and permits for the correct inference from the data. Correctly measuring how strong those complementarities are is important to evaluate the losses from badly allocated teams of collaborators. And it is a key piece of information for policies that aim to achieve the optimal allocation of resources, for example unemployment insurance that provides incentives for the unemployed to look hard for the right job.
