Match Quality, Contractual Sorting and Wage Cyclicality

We ask whether match-specific quality has an effect on the type of contractual arrangements offered by firms to workers. We find evidence that this is the case and that contractual sorting is of first-order importance for wage dynamics.

João Alfredo Galindo da Fonseca and Yaniv Yedid-Levi

This paper studies the role of match quality for contractual arrangements, wage dynamics and workers’ retention. We develop a model in which profit-maximizing firms offer a performance-based pay contract to retain workers when match-specific productivity is high. Key implications of the model hold in data from the NLSY79, where information about job histories and performance pay is available, suggesting that match quality affects both pay arrangements and employment durations. Direct evidence about the accrual of job offers lends further support to the hypothesis that employers use performance-related compensation to preserve high-quality matches. The nature of contractual arrangements appears to be important for the cyclicality of wages.



  title={Match Quality, Contractual Sorting and Wage Cyclicality},
  author={Galindo da Fonseca, Joao and Gallipoli, Giovanni and Yedid-Levi, Yaniv},
  note = {Working Paper},
  institution={UBC, Vancouver School of Economics}