Working Paper: CEPR ID: DP16922
Authors: Christian Moser; Niklas Engbom; Jan Sauermann
Abstract: We study the nature of firm pay dynamics. To this end, we propose a statistical model that extends the seminal framework by Abowd, Kramarz and Margolis (1999) to allow for idiosyncratically time-varying firm pay policies. We estimate the model using linked employer-employee data for Sweden from 1985 to 2016. By drawing on detailed firm financials data, we show that firms that become more productive and accumulate capital raise pay, whereas firms lower pay as they add workers. A secular increase in firm-year pay dispersion in Sweden since 1985 is accounted for by greater persistence of firm pay among incumbent firms as well as greater dispersion in firm pay among entrant firms, as opposed to more volatile firm pay.
Keywords: earnings inequality; worker and firm heterogeneity; firm dynamics; linked employer-employee data; two-way fixed effects model
JEL Codes: J31; D22; D31; E24; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms that become more productive and accumulate capital (D25) | Raise pay (J33) |
| Firms increase employment (J23) | Firms lower pay (J31) |
| Firm-year fixed effects account for variance of log monthly earnings (C23) | Increase to 19-24% when allowing for time-varying firm pay (J33) |
| Secular increase in firm-year pay dispersion in Sweden since 1985 (J31) | Greater persistence among incumbent firms and increased dispersion among new entrants (L19) |
| Firm pay dynamics (J33) | Contribution to earnings inequality (D31) |
| Autocorrelation of firm pay (J31) | Indicates persistence over time (C41) |