As part of Columbia University's Spring 2024 Development Workshop, Andrea Prat will present "Meritocracy across countries" at the Development Seminar.
Are labor markets more meritocratic in richer countries? If so, why? And what are the implications of greater meritocracy for cross-country income differences? We provide answers by comparing the extent to which workers with different skills are matched with jobs that require those skills, using individual-level data on a sample of 120k working-age people across 28 countries. We find a positive correlation between meritocracy and national income, and investigate three factors that underpin it: (i) production functions, which determines the productivity of matches; (ii) endowments of worker skills and job skill requirements, which determine the feasibility of matches; (iii) frictions capturing the importance of idiosyncratic (non-productive) worker and job traits for the matching process. By estimating a structural model of equilibrium matching with multiple skill dimensions, we find that idiosyncratic frictions lead to a deviation from the output-maximizing allocation of workers to jobs and thereby a gap between actual and potential output in all countries, particularly in the poorest ones. However, technology and endowment differences primarily explain the variation in meritocracy and national income across countries. Therefore, policies aimed at reducing idiosyncratic frictions to improve matches will not be effective unless they are combined with interventions that enhance match productivity.