Meritocracy Across Countries

Oriana Bandiera - London School of Economics
Wed, Apr 10 2024, 3:30pm - 5:00pm PDT
GSB Bass Center, Room B400
655 Knight Way, Stanford

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Joint Applied Micro Seminar
Co-authors: Ananya Kotia, Ilse Lindenlaub, Christian Moser, and Andrea Prat

Are labor markets in higher-income countries more meritocratic? If so, why? And what are the aggregate consequences? Using internationally comparable data on the worker skills and job skill requirements of over 120,000 individuals across 28 countries, we document that workers’ skills better match their jobs’ skill requirements in higher-income countries. We find evidence of three mechanisms that potentially underlie this: Higher-income countries have more aligned distributions of worker skills and job skill requirements, greater wage returns to skill-based matching, and lower residual wage dispersion conditional on skills. To interpret these facts and quantify the role of worker-job matching in development accounting, we build an equilibrium matching model that allows for cross-country differences in three fundamentals: (i) the endowments of multidimensional worker skills and job skill requirements, which determine match feasibility; (ii) technology, which determines the returns to matching; and (iii) idiosyncratic matching frictions, which capture the role of nonproductive worker and job traits in the matching process. The estimated model delivers two key insights. First, improvements in worker-job matching as the result of reduced matching frictions account for a small share of cross-country income differences. Second, however, improved worker-job matching is crucial for unlocking the gains from economic development generated by adopting frontier endowments and technology.