Does the return to match quality depend on workers' outside options?

This project examines whether the relationship between an employee’s match quality – how well the employee’s skills correspond to the job’s qualification requirements – and his wage depends on his alternative employment opportunities. A relatively recent strand of search and matching theory suggests that employees who hold valuable matches can use external offers as a leverage in negotiations with their current employer, thereby increasing their wage. Thus, it is necessary to have both a high match quality and useful outside options to reach a high wage. Does this type of bargaining play an important role in the labour market? Despite some structural econometric research and surveys on bargaining, to the best of our knowledge, there are no direct empirical tests of this theory. In this project, we aim at using an empirical measure of match quality based on multidimensional skill measures. We will then test the theory described above using several proxies of employees’ outside options. The project utilises information from Utbildningsdatabasen.