Precautionary Mismatch

Authors – Jincheng Eric Huang, Xincheng Qiu.

Abstract :

How does wealth affect the extent to which right workers are matched with right jobs? Using NLSY79 and O*NET, we document that poorer workers are more mismatched with their jobs. We develop a framework featuring worker and firm heterogeneity, search frictions, and incomplete markets. Workers and firms face a trade-off between the worker-job fit and the speed of forming a match, and lower asset holdings make workers and firms agree upon a larger range of acceptable matches. We refer to this phenomenon as “precautionary mismatch” and show that it leads to substantial earnings and productivity dispersion between wealth-rich and wealth-poor workers of the same production type. We estimate that total output would be 3\% higher in the US if all employed workers were allocated to the right jobs. In a quantitative experiment, we find that wealth transfers from incumbent workers to young labor market entrants reduce within-type earnings inequality and enhance labor productivity. Most of the productivity gains come from reduced under-matches of high-productivity workers.