Schooling Choice, Labour Market Matching, and Wages

TL;DR

This paper develops a method to analyze how pre-matching investments and market frictions influence labor market matching and wages, using a model that accounts for endogenous education choices and heterogeneity.

Contribution

It introduces an inference procedure for a two-sided matching model with endogenous agent characteristics, applicable to single cross-section data, combining discrete choice and simulation techniques.

Findings

Provides a valid inference method for complex matching models

Models endogenous education decisions in labor markets

Analyzes the impact of market frictions on wages

Abstract

We develop inference for a two-sided matching model where the characteristics of agents on one side of the market are endogenous due to pre-matching investments. The model can be used to measure the impact of frictions in labour markets using a single cross-section of matched employer-employee data. The observed matching of workers to firms is the outcome of a discrete, two-sided matching process where firms with heterogeneous preferences over education sequentially choose workers according to an index correlated with worker preferences over firms. The distribution of education arises in equilibrium from a Bayesian game: workers, knowing the distribution of worker and firm types, invest in education prior to the matching process. Although the observed matching exhibits strong cross-sectional dependence due to the matching process, we propose an asymptotically valid inference procedure that combines discrete choice methods with simulation.