Instituto de Economía

Abstract: Workers differ by reliability and cognitive skills. We investigate how a static competitive labor market sort such heterogenous workers into different teams and roles within teams. The model integrates the Roy model of occupational choice with Becker’s model of positive assortative matching. There is a close relationship between occupational choice and who matches with whom. There are establishment/firm wage effects. It is also consistent with the empirical finding that, within many countries, most of the recent changes in earnings inequality are due to changes in earnings inequality across firms and not within firms.