Firm-Worker Matches: Experience or Inspection Goods?

We propose a novel empirical strategy to infer the extent to which firm-worker matches are inspection or experience goods. We argue that the informative content of the signals that firms and workers receive about the productivity of their match before entering an employment relationship can be inferred from the gaps between the separation rates of workers hired from unemployment, employment at low-tenure jobs, and employment at high-tenure jobs. We implement the strategy using German administrative data. We find that, before entering an employment relationship, a firm and a worker receive a signal that reduces the variance of their beliefs about the productivity of the match by 67%. The informative content of the signal varies according to the gender and the education of the worker, and it has increased over time. If matches were pure inspection goods, labor productivity would be 1.5% higher, and output 2% higher. If matches were pure experience goods, labor productivity would be 2% lower, and output 4% lower.