Study quantifies firm-worker match information content

This working paper introduces a novel empirical strategy to infer the extent to which firm-worker matches are inspection or experience goods.

The authors argue that the informative content of signals received by firms and workers about match productivity before employment can be deduced from the gaps in separation rates across different hiring contexts: unemployment, low-tenure jobs, and high-tenure jobs.

Implementing this strategy with German administrative data, the study finds that pre-employment signals reduce the variance of beliefs about match productivity by 67%.

This informative content varies significantly by worker gender and education, with women receiving less informative signals and vocational degree holders receiving more.

The study also observes an increase in signal informativeness over time, specifically between the 1976-1985 and 2006-2015 decades.

The calibrated model accurately matches the observed decline in separation rates with tenure and the distinct gaps in separation rates for workers from different employment states.

The paper's theoretical framework, building on prior models, posits a frictional labor market where firms and workers receive a signal about match productivity upon meeting.

This signal's informativeness determines whether matches are inspection, experience, or a mixture.

The equilibrium analysis shows that workers from less valuable employment states are more prone to entering new, lower-quality relationships.

Economically, the study estimates that if matches were pure inspection goods, labor productivity would increase by 1.5% and output by 2%.

Conversely, if matches were pure experience goods, productivity would fall by 2% and output by 4%.

This underscores the substantial impact of information frictions on labor market efficiency and aggregate economic outcomes.