DP9680 Matching and Sorting in a Global Economy
We develop a neoclassical trade model with heterogeneous factors of production. We consider a world with two factors, labor and "managers", each with a distribution of ability levels. Production combines a manager of some type with a group of workers. The output of a unit depends on the types of the two factors, with complementarity between them, while exhibiting diminishing returns to the number of workers. We examine the sorting of factors to sectors and the matching of factors within sectors, and we use the model to study the determinants of the trade pattern and the effects of trade on the wage and salary distributions. Finally, we extend the model to include search frictions and consider the distribution of employment rates.