Working Paper: CEPR ID: DP17327
Authors: Joana Silva; Martim Leitao; Jaime Montana
Abstract: This paper examines the mechanisms through which firms impact earnings inequality dynamics. Using a rich combination of administrative matched employer-employee-job title data, and detailed technology adoption firm surveys for Portugal, we show that the decrease in wage inequality has arisen from a compression in the firm pay premium, the job title pay premium and their covariance. These effects were mainly driven by a decline in passthrough from firm characteristics to pay, rather than changes in the distribution of these characteristics. Results show that workforce composition and labor productivity are the main drivers of firm pay premiums compression, and that this effect comes from a decline in returns to these characteristics. An increasing share of workers earning the minimum wage and a reduction in labor market concentration also contributed to the fall in between-firm pay premium dispersion but had smaller roles. We also find that technological adoption increases within-firm labor income inequality. Our results shed new light on how firms impact labor income inequality dynamics and have profound policy implications for the design of policies to mitigate inequality.
Keywords: Labor Market; Wage Inequality; Firms; Institutions; Technology; Concentration
JEL Codes: J00; J31; J40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in wage inequality (F66) | compression of firm pay premiums (J32) |
| decline in wage inequality (F66) | compression of job title pay premiums (J33) |
| compression of firm pay premiums (J32) | decline in passthrough from firm characteristics to pay (H32) |
| workforce composition and labor productivity (J21) | compression of firm pay premiums (J32) |
| increasing share of minimum wage workers (J38) | fall in between-firm pay premium dispersion (J31) |
| reduced labor market concentration (J49) | fall in between-firm pay premium dispersion (J31) |
| technological adoption (O33) | within-firm labor income inequality (J31) |