Firms and Labor Market Inequality: Evidence and Some Theory
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.
We are extremely grateful to Raffaele Saggio for assistance in preparing this paper, and to Katherine Shaw and David Green for helpful suggestions on an earlier draft. Cardoso acknowledges financial support from the Spanish Ministry of Economy and Competitiveness (Severo Ochoa Programme for Centres of Excellence in R&D grant SEV-2015-0563) and the Research Council of Norway (Europe in Transition funding scheme project 227072/F10 at ESOP). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, vol 36(S1), pages S13-S70. citation courtesy of
Firms and Labor Market Inequality: Evidence and Some Theory, David Card, Ana Rute Cardoso, Jorg Heining, Patrick Kline. in Firms and the Distribution of Income: The Roles of Productivity and Luck, Lazear and Shaw. 2018