Labor Market Sorting with Firm Dynamics

Firms typically hire some workers and separate from others at the same time, implying that worker flows by far exceed job flows in the aggregate. To understand the reasons behind these worker flows, I study how firms change the skill composition of their workforce as the expand and contract. Using German social security records I document that although larger firms employ higher skilled workers – as measured with a worker fixed effect – firms downgrade (upgrade) worker skills as they expand (contract).

I construct a search and matching model with firm dynamics and multi-dimensional sorting and estimate it with German social security data. I identify the production function that induces positive sorting in the cross section as well as the observed relationship between the compositional changes of worker quality and firm growth. Using the estimated model I find that the identified sorting pattern is crucial to explain the behavior of firm level worker flows.