Sorting along Business Cycles

TL;DR

This paper presents a tractable model of labor market sorting that links firm productivity, worker income, and business cycle fluctuations driven by market efficiency shocks, aligning with empirical observations.

Contribution

It introduces a novel analytical model capturing heterogeneous workers and firms, illustrating how business cycles affect income and productivity distributions through sorting mechanisms.

Findings

Model aligns with empirical cyclical patterns of wages and productivity.

Market efficiency shocks favor more productive firms during cycles.

Firms' hiring decisions influence income and productivity distributions.

Abstract

We develop an analytically tractable model featuring heterogeneous workers and firms, where labor markets clear through a one-to-many sorting mechanism. Firms determine both the number and composition of their employees, shaping (1) the income distribution among workers and (2) the productivity distribution across firms. We study business cycles driven by market efficiency shocks that disproportionately benefit more productive firms. The model's implications are consistent with empirical regularities on the cyclical behavior of wage and productivity distributions.