Firms and Labor Market Inequality: Evidence and Some Theory

David Card, Ana Rute Cardoso, Jörg Heining, Patrick Kline

NBER Working Paper No. 22850
Issued in November 2016
NBER Program(s):Economic Fluctuations and Growth, Labor Studies, Public Economics, Productivity, Innovation, and Entrepreneurship

We survey two growing bodies of research on firm-level drivers of labor market inequality. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. Given the wide variation in firm-specific productivity, elasticities of this size suggest that a significant fraction of wage inequality is tied to firm performance. A second literature estimates two-way fixed effects models that rely on the wage changes of people who move between firms to identify firm-specific wage premiums. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model of firm wage setting in which workers have idiosyncratic tastes for different workplaces. We show that simple versions of this model can rationalize the standard two-way fixed effects specification proposed by Abowd, Kramarz and Margolis (1999), and can also match the typical “rent-sharing” elasticities estimated in the literature. Extended versions of the model can potentially explain differences in the wage premiums paid by a given employer to different subgroups of workers.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22850


Users who downloaded this paper also downloaded* these:
Guzman and Stiglitz w22838 Pseudo-wealth and Consumption Fluctuations
Herkenhoff, Phillips, and Cohen-Cole w22846 The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship
Song, Price, Guvenen, Bloom, and von Wachter w21199 Firming Up Inequality
Helpman w22944 Globalization and Wage Inequality
Stiglitz w22837 The Theory of Credit and Macro-economic Stability
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us