Sorting along Business Cycles

Abstract: We develop an analytically tractable model featuring heterogeneous workers and firms, where labor markets clear through a one-to-many sorting mechanism. Firms determine both the number and composition of their employees, shaping (1) the income distribution among workers and (2) the productivity distribution across firms. We study business cycles driven by market efficiency shocks that disproportionately benefit more productive firms. The model's implications are consistent with empirical regularities on the cyclical behavior of wage and productivity distributions.