Sorting and the output loss due to search frictions

We analyze a general search model with on-the-job search (OJS) and sorting of heterogeneous
workers into heterogeneous jobs. For given values of non-market time, the relative efciency of
OJS, and the amount of search frictions, we derive a simple relationship between the unemployment
rate, mismatch and wage dispersion. We estimate the latter two from standard micro data. Our
methodology accounts for measurement error, which is crucial to distinguish true from spurious
mismatch and wage dispersion. We nd that without frictions, output would be about 9.5% higher if
rms can commit to pay wages as a function of match quality and 15.5% higher if they cannot. Noncommitment leads to a business-stealing externality which causes a 5.5% drop in output.