Labor Market Sorting in Germany

Abstract

This paper analyzes the allocation of workers to jobs and the wage distribution in Germany. We use the wage-based rank aggregation procedure proposed by Hagedorn et al. (2017) to infer worker ranks. On the firm side, we use rich survey data to rank firms based on unobserved productivity shocks, estimated using the Ackerberg et al. (2015) control function approach. Importantly, our data allows us to control for the composition of the workforce at the firm level. We show that our firm ranking resembles many recent findings in the literature on „superstar“-firms (e.g. Autor et al., 2017), that is, a falling labor share and rising sales/employment concentration in the estimated firm type. We find that „superstar“-firms have reduced their hiring of the highest worker types, whose distribution across all firm types has become more uniform over time. This is associated with less wage growth for these worker types. Also, this development reduced the degree of positive labor market sorting in Germany, even though large numbers of new matches between low type workers and low type firms led to a net increase of sorting. We link our findings to some elements of the German labor market reforms from 2003–2005 and to increased outsourcing, especially in the manufacturing sector, which does not only affect low-type workers.